##### Table of Contents









SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




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Form 10-Q

|           |  |                                                                                                 
|---------- |  | ------------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                                 
|þ          |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR
    15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934 
|          
|           |  | For the quarterly period ended March 31,
    2002                                               
|          
|or        
|          
|o          |  | 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 0-22585



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Trover Solutions, Inc.

(Exact Name of Registrant as Specified in its
Charter)


|                                                                                           |  |                                         
|------------------------------------------------------------------------------------------ |  | ----------------------------------------
|Delaware                                                                                   |  | 61-1141758                              
|(State or Other Jurisdiction of
    Incorporation or Organization)                         |  | (I.R.S. Employer
    Identification No.)
|                                                                                          
|1600 Watterson Tower,
    Louisville, Kentucky(Address of Principal Executive
    Offices) |  | 40218(Zip Code)                         

(Registrants Telephone Number, Including
Area Code)

(502) 454-1340


1400 Watterson Tower,

Louisville, Kentucky


(Former name, former address and former fiscal
year,

if changed since last report)


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 þ No
o

As of May 14, 2002, 9,297,633 shares of the
Registrants Common Stock, $0.001 par value were
outstanding.



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##### Table of Contents



TROVER SOLUTIONS, INC.

FORM 10-Q

March 31, 2002







INDEX


|                                   |  |                                                                                                       |    |      |    | 
|---------------------------------- |  | ----------------------------------------------------------------------------------------------------- | -- | ---- | -- | 
|                                   |  |                                                                                                       |    | Page
|                                   |  |                                                                                                       |    |     
|PART I:  FINANCIAL
    INFORMATION
|                                  
|Item 1.                            |  | Financial Statements (Unaudited)                                                                      |    |      | 1  | 
|                                   |  | Condensed Balance Sheets as of March 31,
    2002 and December 31, 2001                               |    |      | 1  | 
|                                   |  | Condensed Statements of Income for the three
    months ended March 31, 2002 and 2001                 |    |      | 2  | 
|                                   |  | Condensed Statements of Cash Flows for the three
    months ended March 31, 2002 and 2001             |    |      | 3  | 
|                                   |  | Notes to Condensed Financial Statements                                                               |    |      | 4  | 
|Item 2.                            |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations (Unaudited) |    |      | 11 | 
|Item 3.                            |  | Quantitative and Qualitative Disclosures About
    Market Risk                                        |    |      | 21 | 
|PART II:  OTHER
    INFORMATION   
|Item 1.                            |  | Legal Proceedings                                                                                     |    |      | 22 | 
|Item 2.                            |  | Changes in Securities and Use of Proceeds                                                             |    |      | 26 | 
|Item 6.                            |  | Exhibits and Reports on Form 8-K                                                                      |    |      | 27 | 
|Signatures                         |  |                                                                                                       | 28 |     

THIS FORM 10-Q AND OTHER STATEMENTS ISSUED
OR MADE FROM TIME TO TIME BY TROVER SOLUTIONS, INC. OR MEMBERS
OF ITS MANAGEMENT TEAM CONTAIN STATEMENTS WHICH MAY CONSTITUTE
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE
SECURITIES ACT OF 1933 AND THE SECURITIES EXCHANGE ACT OF 1934,
AS AMENDED BY THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995, 15 U.S.C.A. SECTIONS 77Z-2 AND 78U-5 (SUPP.
1996). THOSE STATEMENTS INCLUDE STATEMENTS REGARDING THE INTENT,
BELIEF OR CURRENT EXPECTATIONS OF TROVER SOLUTIONS, INC. AND
MEMBERS OF ITS MANAGEMENT TEAM, AS WELL AS THE ASSUMPTIONS ON
WHICH SUCH STATEMENTS ARE BASED. PROSPECTIVE INVESTORS ARE
CAUTIONED THAT ANY SUCH FORWARD-LOOKING STATEMENTS ARE NOT
GUARANTEES OF FUTURE PERFORMANCE AND INVOLVE RISKS AND
UNCERTAINTIES, AND THAT ACTUAL RESULTS MAY DIFFER MATERIALLY
FROM THOSE CONTEMPLATED BY SUCH FORWARD-LOOKING STATEMENTS.
IMPORTANT FACTORS CURRENTLY KNOWN TO MANAGEMENT THAT COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN
FORWARD-LOOKING STATEMENTS ARE SET FORTH IN THE SAFE HARBOR
COMPLIANCE STATEMENT FOR FORWARD-LOOKING STATEMENTS INCLUDED AS
EXHIBIT 99.1 TO THE TROVER SOLUTIONS, INC. ANNUAL REPORT ON
FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001, AS
AMENDED BY EXHIBIT 99.2 TO THIS QUARTERLY REPORT ON
FORM 10-Q, AND ARE HEREBY INCORPORATED HEREIN BY REFERENCE.
TROVER SOLUTIONS, INC. UNDERTAKES NO OBLIGATION TO UPDATE OR
REVISE FORWARD-LOOKING STATEMENTS TO REFLECT CHANGED ASSUMPTIONS
OR CIRCUMSTANCES, THE OCCURRENCE OF UNANTICIPATED EVENTS OR
CHANGES TO FUTURE OPERATING RESULTS OVER TIME.

i



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TABLE OF CONTENTS



|                                                |                                                                                               |  |  |  |  |  |  | 
|----------------------------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|INDEX                                          
|PART I: FINANCIAL INFORMATION                  
|                                                | Item 1. Financial Statements (Unaudited)                                                     
|                                                | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                                | Item 3. Quantitative and Qualitative Disclosures About Market Risk                           
|PART II OTHER INFORMATION                      
|                                                | Item 1. Legal Proceedings                                                                    
|                                                | Item 2. Changes in Securities and Use of Proceeds                                            
|                                                | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                                     
|Form of Severance Agreement                    
|Amend to Trover Solutions Litigation Reform Act



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##### Table of Contents






PART I:     FINANCIAL
INFORMATION






Item 1.     Financial
Statements (Unaudited)


TROVER SOLUTIONS, INC.

CONDENSED BALANCE SHEETS

(Unaudited)


(In thousands, except per share
information)


|                                           |                                                                                                                                                                        |                                            |        |              |        |  |        |         |        | 
|------------------------------------------ | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------ | ------------ | ------ |  | ------ | ------- | ------ | 
|                                           |                                                                                                                                                                        | March 31,                                  |        | December 31,
|                                           |                                                                                                                                                                        | 2002                                       |        | 2001        
|                                           |                                                                                                                                                                        |                                            |        |             
|ASSETS                                     |                                                                                                                                                                        |                                            |        |             
|Current assets:                            |                                                                                                                                                                        |                                            |        |              |        |  |        |        
|                                           | Cash and cash equivalents                                                                                                                                              |                                            | $      | 1,678        |        |  | $      | 2,547   |       
|                                           | Restricted cash                                                                                                                                                        |                                            |        | 17,860       |        |  |        | 18,035  |       
|                                           | Accounts receivable, less allowance for doubtful
    accounts of $504 at March 31, 2002 and $509 at
    December 31, 2001                                              |                                            |        | 8,698        |        |  |        | 9,382   |       
|                                           | Other current assets                                                                                                                                                   |                                            |        | 1,706        |        |  |        | 1,805   |       
|                                           |                                                                                                                                                                        |                                            |        |              |        |  |        |        
|                                           |                                                                                                                                                                        | Total current assets                       |        |              | 29,942 |  |        |         | 31,769 | 
|                                           |                                                                                                                                                                        |                                            |        |              |        |  |        |        
|Property and equipment, at cost:           |                                                                                                                                                                        |                                            |        |              |        |  |        |        
|                                           | Furniture and fixtures                                                                                                                                                 |                                            |        | 3,114        |        |  |        | 3,112   |       
|                                           | Office equipment                                                                                                                                                       |                                            |        | 2,053        |        |  |        | 2,041   |       
|                                           | Computer equipment                                                                                                                                                     |                                            |        | 10,674       |        |  |        | 10,256  |       
|                                           | Software                                                                                                                                                               |                                            |        | 7,667        |        |  |        | 7,119   |       
|                                           | Leasehold improvements                                                                                                                                                 |                                            |        | 1,399        |        |  |        | 1,500   |       
|                                           |                                                                                                                                                                        |                                            |        |              |        |  |        |        
|                                           |                                                                                                                                                                        |                                            | 24,907 |              |        |  | 24,028 |        
|                                           | Accumulated depreciation and amortization                                                                                                                              |                                            |        | (18,492      | )      |  |        | (17,409 | )     
|                                           |                                                                                                                                                                        |                                            |        |              |        |  |        |        
|                                           |                                                                                                                                                                        | Property and equipment, net                |        |              | 6,415  |  |        |         | 6,619  | 
|                                           |                                                                                                                                                                        |                                            |        |              |        |  |        |        
|Cost in excess of net assets acquired, net |                                                                                                                                                                        |                                            | 29,146 |              |        |  | 29,146 |        
|Identifiable intangibles, net              |                                                                                                                                                                        |                                            | 4,232  |              |        |  | 4,372  |        
|Other assets                               |                                                                                                                                                                        |                                            | 2,614  |              |        |  | 2,557  |        
|                                           |                                                                                                                                                                        |                                            |        |              |        |  |        |        
|                                           |                                                                                                                                                                        | Total assets                               |        | $            | 72,349 |  |        | $       | 74,463 | 
|                                           |                                                                                                                                                                        |                                            |        |              |        |  |        |        
|LIABILITIES AND STOCKHOLDERS
    EQUITY   |                                                                                                                                                                        |                                            |        |             
|Current liabilities:                       |                                                                                                                                                                        |                                            |        |              |        |  |        |        
|                                           | Trade accounts payable                                                                                                                                                 |                                            | $      | 2,031        |        |  | $      | 1,308   |       
|                                           | Accrued expenses                                                                                                                                                       |                                            |        | 3,579        |        |  |        | 3,612   |       
|                                           | Accrued bonuses                                                                                                                                                        |                                            |        | 823          |        |  |        | 2,239   |       
|                                           | Funds due clients                                                                                                                                                      |                                            |        | 12,540       |        |  |        | 12,876  |       
|                                           | Income taxes payable                                                                                                                                                   |                                            |        | 1,039        |        |  |        | 300     |       
|                                           | Deferred income tax liability                                                                                                                                          |                                            |        | 1,007        |        |  |        | 1,007   |       
|                                           |                                                                                                                                                                        |                                            |        |              |        |  |        |        
|                                           |                                                                                                                                                                        | Total current liabilities                  |        |              | 21,019 |  |        |         | 21,342 | 
|Other liabilities                          |                                                                                                                                                                        |                                            | 2,370  |              |        |  | 2,355  |        
|Long-term borrowings                       |                                                                                                                                                                        |                                            | 6,000  |              |        |  | 8,000  |        
|                                           |                                                                                                                                                                        |                                            |        |              |        |  |        |        
|                                           |                                                                                                                                                                        | Total liabilities                          |        |              | 29,389 |  |        |         | 31,697 | 
|                                           |                                                                                                                                                                        |                                            |        |              |        |  |        |        
|Commitments and contingencies              |                                                                                                                                                                        |                                            |       |              |        |  |       |        
|Stockholders equity:                      |                                                                                                                                                                        |                                            |        |              |        |  |        |        
|                                           | Preferred stock, $.001 par value per share; 2,000
    shares authorized; no shares outstanding                                                                         |                                            |        |             |        |  |        |        |       
|                                           | Common stock, $.001 par value per share; 20,000
    shares authorized; 9,533 and 9,791 shares outstanding as of
    March 31, 2002 and December 31, 2001, respectively |                                            |        | 12           |        |  |        | 12      |       
|                                           | Capital in excess of par value                                                                                                                                         |                                            |        | 22,839       |        |  |        | 22,758  |       
|                                           | Other                                                                                                                                                                  |                                            |        | (988         | )      |  |        | (973    | )     
|                                           | Unearned compensation                                                                                                                                                  |                                            |        | (51          | )      |  |        |        |       
|                                           | Treasury stock at cost; 2,063 shares at
    March 31, 2002 and 1,792 shares at December 31, 2001                                                                       |                                            |        | (8,641       | )      |  |        | (7,116  | )     
|                                           | Accumulated other comprehensive income                                                                                                                                 |                                            |        | 40           |        |  |        | 27      |       
|                                           | Retained earnings                                                                                                                                                      |                                            |        | 29,749       |        |  |        | 28,058  |       
|                                           |                                                                                                                                                                        |                                            |        |              |        |  |        |        
|                                           |                                                                                                                                                                        | Total stockholders equity                 |        |              | 42,960 |  |        |         | 42,766 | 
|                                           |                                                                                                                                                                        |                                            |        |              |        |  |        |        
|                                           |                                                                                                                                                                        | Total liabilities and stockholders equity |        | $            | 72,349 |  |        | $       | 74,463 | 
|                                           |                                                                                                                                                                        |                                            |        |              |        |  |        |        

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

1



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##### Table of Contents



TROVER SOLUTIONS, INC.

CONDENSED STATEMENTS OF INCOME

For the Three Months Ended March 31, 2002
and 2001


(Unaudited)


(In thousands, except per share
information)


|                                              |                            |                    |        |        |  |   |        |       | 
|--------------------------------------------- | -------------------------- | ------------------ | ------ | ------ |  | - | ------ | ----- | 
|                                              |                            |                   
|                                              |                            | Three Months Ended
|                                              |                            | March 31,         
|                                              |                            |                   
|                                              |                            | 2002               |        | 2001  
|                                              |                            |                    |        |       
|Claims revenues                               |                            | $                  | 17,469 |        |  | $ | 16,255 |      
|Cost of services                              |                            |                    | 8,482  |        |  |   | 7,738  |      
|                                              |                            |                    |        |        |  |   |        |      
|                                              | Gross profit               |                    |        | 8,987  |  |   |        | 8,517 | 
|                                              |                            |                    |        |        |  |   |        |      
|Support expenses                              |                            |                    | 4,899  |        |  |   | 4,496  |      
|Depreciation and amortization                 |                            |                    | 1,289  |        |  |   | 1,585  |      
|Research and development                      |                            |                    |       |        |  |   | 134    |      
|                                              |                            |                    |        |        |  |   |        |      
|                                              | Operating income           |                    |        | 2,799  |  |   |        | 2,302 | 
|Interest income                               |                            |                    | 68     |        |  |   | 350    |      
|Interest expense                              |                            |                    | 139    |        |  |   | 303    |      
|                                              |                            |                    |        |        |  |   |        |      
|                                              | Income before income taxes |                    |        | 2,728  |  |   |        | 2,349 | 
|Provision for income taxes                    |                            |                    | 1,037  |        |  |   | 974    |      
|                                              |                            |                    |        |        |  |   |        |      
|                                              | Net income                 |                    | $      | 1,691  |  |   | $      | 1,375 | 
|                                              |                            |                    |        |        |  |   |        |      
|Earnings per common share (basic and diluted) |                            | $                  | 0.17   |        |  | $ | 0.14   |      
|                                              |                            |                    |        |        |  |   |        |      
|Shares used in earning per share calculation: |                            |                    |        |        |  |   |        |      
|                                              | Basic                      |                    |        | 9,749  |  |   |        | 9,789 | 
|                                              | Diluted                    |                    |        | 10,052 |  |   |        | 9,889 | 

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

2



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##### Table of Contents



TROVER SOLUTIONS, INC.

CONDENSED STATEMENTS OF CASH FLOWS

For the Three Months Ended March 31, 2002
and 2001


(Unaudited)


(In thousands)


|                                                         |                                                                                       |                                              |                                                         |        |       |        |       |       |       |        |  
|-------------------------------------------------------- | ------------------------------------------------------------------------------------- | -------------------------------------------- | ------------------------------------------------------- | ------ | ----- | ------ | ----- | ----- | ----- | ------ | -
|                                                         |                                                                                       |                                             
|                                                         |                                                                                       | Three Months Ended                          
|                                                         |                                                                                       | March 31,                                   
|                                                         |                                                                                       |                                             
|                                                         |                                                                                       | 2002                                         |                                                         | 2001  
|                                                         |                                                                                       |                                              |                                                         |       
|Cash flows from operating activities:                    |                                                                                       |                                              |                                                         |        |       |        |       |      
|                                                         | Net income                                                                            |                                              | $                                                       | 1,691  |       |        | $     | 1,375 |      
|                                                         | Adjustments to reconcile net income to net cash
    provided by operating activities: |                                              |                                                         |        |       |        |       |       |      
|                                                         |                                                                                       | Depreciation and amortization                |                                                         |        | 1,369 |        |       |       | 1,585 |       
|                                                         |                                                                                       | Other                                        |                                                         |        | 15    |        |       |       | 3     |       
|                                                         |                                                                                       | Changes in operating assets and liabilities: |                                                         |        |       |        |       |       |       |       
|                                                         |                                                                                       |                                              | Restricted cash                                         |        |       | 175    |       |       |       | (710   | )
|                                                         |                                                                                       |                                              | Accounts receivable                                     |        |       | 684    |       |       |       | (846   | )
|                                                         |                                                                                       |                                              | Other current assets                                    |        |       | 144    |       |       |       | (65    | )
|                                                         |                                                                                       |                                              | Other assets                                            |        |       | (246   | )     |       |       | (46    | )
|                                                         |                                                                                       |                                              | Trade accounts payable                                  |        |       | 723    |       |       |       | 210    |  
|                                                         |                                                                                       |                                              | Accrued expenses                                        |        |       | (1,449 | )     |       |       | (1,354 | )
|                                                         |                                                                                       |                                              | Funds due clients                                       |        |       | (336   | )     |       |       | 297    |  
|                                                         |                                                                                       |                                              | Income taxes payable                                    |        |       | 739    |       |       |       | 873    |  
|                                                         |                                                                                       |                                              | Other liabilities                                       |        |       | 15     |       |       |       | (53    | )
|                                                         |                                                                                       |                                              |                                                         |        |       |        |       |      
|                                                         |                                                                                       |                                              | Net cash provided by operating activities               |        |       | 3,524  |       |       |       | 1,269  |  
|                                                         |                                                                                       |                                              |                                                         |        |       |        |       |      
|Cash flows from investing activities:                    |                                                                                       |                                              |                                                         |        |       |        |       |      
|                                                         | Purchases of property and equipment                                                   |                                              |                                                         | (425   | )     |        |       | (231  | )    
|                                                         | Capitalization of internally developed software                                       |                                              |                                                         | (455   | )     |        |       | (494  | )    
|                                                         |                                                                                       |                                              |                                                         |        |       |        |       |      
|                                                         |                                                                                       |                                              | Net cash used in investing activities                   |        |       | (880   | )     |       |       | (725   | )
|                                                         |                                                                                       |                                              |                                                         |        |       |        |       |      
|Cash flows from financing activities:                    |                                                                                       |                                              |                                                         |        |       |        |       |      
|                                                         | Line of credit repayments                                                             |                                              |                                                         | (2,000 | )     |        |       |      |      
|                                                         | Repurchase of common stock                                                            |                                              |                                                         | (1,565 | )     |        |       |      |      
|                                                         | Issuance of common stock                                                              |                                              |                                                         | 67     |       |        |       | 46    |      
|                                                         | Other                                                                                 |                                              |                                                         | (15    | )     |        |       | (15   | )    
|                                                         |                                                                                       |                                              |                                                         |        |       |        |       |      
|                                                         |                                                                                       |                                              | Net cash (used in) provided by financing
    activities |        |       | (3,513 | )     |       |       | 31     |  
|                                                         |                                                                                       |                                              |                                                         |        |       |        |       |      
|Net (decrease) increase in cash and cash
    equivalents |                                                                                       |                                              | (869                                                    | )      |       |        | 575   |      
|Cash and cash equivalents, beginning of period           |                                                                                       |                                              | 2,547                                                   |        |       |        | 1,297 |      
|                                                         |                                                                                       |                                              |                                                         |        |       |        |       |      
|Cash and cash equivalents, end of period                 |                                                                                       | $                                            | 1,678                                                   |        |       | $      | 1,872 |      
|                                                         |                                                                                       |                                              |                                                         |        |       |        |       |      

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

3



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##### Table of Contents



TROVER SOLUTIONS, INC.

NOTES TO CONDENSED FINANCIAL
STATEMENTS

(Unaudited)


1.     Organization
and Basis of Presentation

Healthcare Recoveries, Inc. changed its name to
Trover Solutions, Inc. (hereinafter referred to as the
Company) effective January 15, 2002. The
Company, a Delaware corporation, was incorporated on
June 30, 1988. The Company is a provider of outsourcing of
subrogation and certain other claims recovery and cost
containment services to the private healthcare payor industry
and the property and casualty insurance industry. Its primary
business is medical claims recovery, and its primary product is
subrogation recovery, which generally entails the
identification, investigation and recovery of accident-related
medical benefits incurred by its clients on behalf of their
insureds, but for which other persons or entities have primary
responsibility. The Companys clients rights to
recover the value of these medical benefits, arising by law or
contract, are generally known as the right of subrogation and
are generally paid from the proceeds of liability or
workers compensation insurance. The Companys other
medical claims recovery services include (1) the auditing
of the bills of medical providers, particularly hospitals, for
accuracy, correctness and compliance with contract terms
(provider bill audit), and (2) the recovery of
overpayments attributable to duplicate payments, failures to
coordinate benefits and similar errors in payment.

The accompanying financial statements are
presented in a condensed format and consequently do not include
all of the disclosures normally required by accounting
principles generally accepted in the United States of America or
those normally made in the Companys annual financial
statements. Accordingly, for further information, the reader of
this Form 10-Q may wish to refer to the Companys
audited financial statements as of and for the year ended
December 31, 2001, contained in the Companys Annual
Report on Form 10-K for the fiscal year ended
December 31, 2001, filed with the Securities and Exchange
Commission on March 27, 2002.

The financial information has been prepared in
accordance with the Companys customary accounting
practices and is unaudited. In the opinion of management of the
Company, the information presented reflects all adjustments
necessary for a fair presentation of interim results. All such
adjustments are of a normal and recurring nature. Certain
financial statement amounts have been reclassified in the prior
period to conform to the current period presentation.

2.     Recently
Issued Accounting Pronouncements

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

Also, in June 2001, the FASB issued Statement of
Financial Accounting Standards No. 142 (FAS 142),
Goodwill and Other Intangible Assets, which
establishes the accounting for goodwill and other intangible
assets following their recognition. FAS 142 applies to all
goodwill and other intangible assets whether acquired singly, as
part of a group, or in a business combination. FAS 142
provides that goodwill should not be amortized but should be
tested for impairment annually using a fair-value based
approach. In addition, FAS 142 provides that other
intangible assets other than goodwill should be amortized over
their useful lives and reviewed for impairment. FAS 142 was
effective for the Company beginning on January 1, 2002. The
Company will now be required to perform a transitional
impairment test under FAS 142 for all goodwill recorded as
of January 1, 2002. Management of the Company has not
performed a transitional impairment test under FAS 142 and
accordingly cannot estimate the impact of the adoption of
FAS 142 as of March 31, 2002.

4



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TROVER SOLUTIONS, INC.


NOTES TO CONDENSED FINANCIAL
STATEMENTS  (Continued)

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

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

3.     Contingencies

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

4.     Credit
Facility

On November 1, 2001, the Company entered
into a revolving credit facility with National City Bank of
Kentucky, Bank One Kentucky, N.A. and Fifth Third Bank (the
Revolving Credit Facility), replacing and
terminating its existing credit facility. The Companys
obligations under the Revolving Credit Facility are secured by
substantially all of the Companys assets, subject to
certain permitted exceptions. The Revolving Credit Facility
carries a maximum borrowing capacity of $40 million and
will mature October 31, 2004. Principal amounts outstanding
under the Revolving Credit Facility bear interest at a variable
rate based on the Prime Rate or Eurodollar Rate, as applicable,
plus a pre-determined fixed margin. At March 31, 2002, the
interest rate was 3.62% based on the one-month Eurodollar Rate.
The Revolving Credit Facility contains customary covenants and
events of default including, but not limited to, financial tests
for interest coverage, net worth levels and leverage that may
limit the Companys ability to pay dividends. It also
contains a material adverse change clause. At March 31,
2002, $6 million was outstanding under the Revolving Credit
Facility.

5.     Stock
Repurchase Plan

As of March 31, 2002, the Companys
Board of Directors had authorized the repurchase of up to
$10 million of the Companys Common Stock in the open
market, at prices per share deemed favorable by the Company.
Shares may be repurchased using cash from operations and
borrowed funds and may continue until such time as the Company
has repurchased $10 million of the Companys Common
Stock or until it otherwise determines to terminate the stock
repurchase plan. The Company repurchased 280,493 shares of its
own stock during the three months ended March 31, 2002 at
an average price of $5.58 per share. From inception of the
program through March 31, 2002, the total number of shares
repurchased was 2,072,758 at a cost of $8.7 million, or an
average cost of $4.19 per share. All of the reacquired shares of
Common Stock through March 31, 2002 are reflected as
treasury stock on the accompanying Condensed Balance Sheets
(Unaudited).

5



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##### Table of Contents



TROVER SOLUTIONS, INC.


NOTES TO CONDENSED FINANCIAL
STATEMENTS  (Continued)

On May 10, 2002, the Companys Board of
Directors authorized the repurchase of up to an additional
$10 million of the Companys Common Stock pursuant to
the stock purchase plan.

6.     Related Party
Transactions

The Company has entered into a contract for legal
services with a professional service corporation,
Sharps & Associates, PSC, that is wholly owned by one
of the Companys officers. This arrangement exists solely
for the benefit of the Company and its purpose is to minimize
the costs of legal services purchased by the Company on behalf
of its clients. Mr. Sharps receives no financial or other
personal benefit from his ownership of the firm. For the three
months ended March 31, 2002, approximately $834,000 was
paid to this law firm for such legal services, including all
employees and expenses.

On February 12, 1999, the Board of Directors
approved a loan in the amount of $350,000 to Patrick B.
McGinnis, the Chairman and Chief Executive Officer of the
Company, in exchange for a full recourse promissory note in the
same amount from Mr. McGinnis. On June 30, 2000, at
the direction of the Board of Directors and in accordance with
terms authorized by it, the Company loaned Mr. McGinnis an
additional $500,000. Under these terms, the $500,000 loan to
Mr. McGinnis was combined with his existing debt to the
Company of $350,000 of principal and $36,520 of accrued
interest. Mr. McGinnis delivered to the Company his full
recourse promissory note in the amount of $886,520, bearing
interest at a fixed rate of 6.62% per annum, compounded annually
(the Amended Promissory Note), and the Company
cancelled the old promissory note evidencing the prior debt. The
Amended Promissory Note provides for mandatory prepayments from
certain of the proceeds received by Mr. McGinnis from his
sale of the Companys securities and any related
transactions. At March 31, 2002, the promissory note of
$886,520 and accrued interest of $102,073 was outstanding.
Mr. McGinnis used the proceeds of these loans to repay
debts originally incurred by him to pay income taxes related to
the ordinary income deemed to have been received by him on
account of Common Stock granted to him in connection with the
initial public offering of the Companys stock in May 1997,
and to purchase additional stock in the initial public offering.

On June 30, 2000, pursuant to the Board of
Directors authorization and in accordance with the terms
of the Amended Promissory Note, the Company and
Mr. McGinnis entered into a deferred compensation agreement
(the Agreement). Under the Agreement, 50% of the
amount otherwise payable to Mr. McGinnis under the
Companys Management Group Incentive Compensation Plan is
to be deferred until the Amended Promissory Note is paid in
full, with such deferred compensation then being paid in full to
Mr. McGinnis within 30 days thereafter. The Company
has full right of set-off against any deferred compensation
under the Agreement should Mr. McGinnis default under the
Amended Promissory Note. At the election of Mr. McGinnis,
the payment of the deferred compensation, upon payment of the
Amended Promissory Note, may be extended for a period of not
more than ten years. At March 31, 2002, the amount of
deferred compensation was $72,354, with accrued interest of
$3,847.

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TROVER SOLUTIONS, INC.


NOTES TO CONDENSED FINANCIAL
STATEMENTS  (Continued)

7.     Earnings Per
Common Share

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

|                                                                   |         |                    |        |      |  |   |       |      | 
|------------------------------------------------------------------ | ------- | ------------------ | ------ | ---- |  | - | ----- | ---- | 
|                                                                   |         |                   
|                                                                   |         | Three Months Ended
|                                                                   |         | March 31,         
|                                                                   |         |                   
|                                                                   |         | 2002               |        | 2001
|                                                                   |         |                    |        |     
|Weighted average number of common shares
    outstanding           |         |                    | 9,749  |      |  |   | 9,789 |     
|Add: Dilutive stock options                                        |         |                    | 303    |      |  |   | 100   |     
|                                                                   |         |                    |        |      |  |   |       |     
|Number of common shares outstanding (diluted)                      |         |                    | 10,052 |      |  |   | 9,889 |     
|                                                                   |         |                    |        |      |  |   |       |     
|Net earnings for earnings per common share (basic
    and diluted) |         | $                  | 1,691  |      |  | $ | 1,375 |     
|                                                                   |         |                    |        |      |  |   |       |     
|Earnings per common share:                                         |         |                    |        |      |  |   |       |     
|                                                                   | Basic   |                    | $      | 0.17 |  |   | $     | 0.14 | 
|                                                                   |         |                    |        |      |  |   |       |     
|                                                                   | Diluted |                    | $      | 0.17 |  |   | $     | 0.14 | 
|                                                                   |         |                    |        |      |  |   |       |     

Basic earnings per common share were computed
based on the weighted-average number of shares outstanding
during the period. The dilutive effect of stock options was
calculated using the treasury stock method. Options to purchase
931,817 shares for the three months ended March 31, 2002
were not included in the computation of diluted earnings per
common share because their effect would be anti-dilutive.

8.     Other
Comprehensive Income (Loss)

Other comprehensive income (loss) for the
three months ended March 31, 2002 and 2001 consists of the
following (in thousands):

|                                       |                                       |                    |       |      |  |   |       |   | 
|-------------------------------------- | ------------------------------------- | ------------------ | ----- | ---- |  | - | ----- | - | 
|                                       |                                       |                   
|                                       |                                       | Three Months Ended
|                                       |                                       | March 31,         
|                                       |                                       |                   
|                                       |                                       | 2002               |       | 2001
|                                       |                                       |                    |       |     
|Net income                             |                                       | $                  | 1,691 |      |  | $ | 1,375 |  
|Other comprehensive income (loss):     |                                       |                    |       |      |  |   |       |  
|                                       | Deferred gain on cash flow hedge, net |                    |       | 13   |  |   |       |  | 
|                                       |                                       |                    |       |      |  |   |       |  
|Other comprehensive income, net of tax |                                       | $                  | 1,704 |      |  | $ | 1,375 |  
|                                       |                                       |                    |       |      |  |   |       |  

9.     Income
Taxes

The Company accrued its income tax at its
historical rate of 41.5% of pretax income, net of a research and
experimental tax credit of $95,000, resulting in an effective
income tax rate of 38.0%.

10.     Derivatives

On November 6, 2001, the Company entered
into an interest rate swap contract to pay 3.66% and to receive
the one-month LIBOR rate on a $4 million notional amount of
the Revolving Credit Facility. The Company uses derivative
financial instruments to manage the risk that changes in
interest rates will affect the amount of its future interest
payments. Under the interest rate swap contract, the Company
agrees to pay an amount equal to a specified fixed rate of
interest times a notional principal amount, and to receive in
return an amount equal to a variable rate of interest times the
same notional principal amount. The notional amounts of the
contract are not exchanged. No other cash payments are made
unless the contract is terminated prior to

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TROVER SOLUTIONS, INC.


NOTES TO CONDENSED FINANCIAL
STATEMENTS  (Continued)

maturity, in which case the amount paid or
received in settlement is established by agreement at the time
of termination, and represents the net present value, at current
rates of interest, of the remaining obligations to exchange
payments under the terms of the contract. The interest rate swap
contract was entered into with a major financial institution in
order to minimize counterparty credit risk. The interest rate
swap transaction qualifies for hedge accounting treatment and is
accounted for in accordance with FAS 133, Accounting
for Derivative Instruments and Hedging Activities, as
amended by FAS 138, Accounting for Certain Derivative
Instruments and Certain Hedging Activities  an
Amendment of FAS 133. At March 31, 2002, the
fair value of the hedge was an asset of $67,980 ($39,768, net of
tax, is included in Accumulated Other Comprehensive Income
(Loss)).

11.     Segment
Information

Statement of Financial Accounting Standards
No. 131, Disclosures about Segments of an Enterprise
and Related Information, established standards for
reporting information about operating segments in the
Companys financial statements. It also established
standards for related disclosures about products and services,
and geographic areas. Operating segments are defined as
components of an enterprise about which separate financial
information is available that is evaluated regularly by the
chief operating decision maker, or decision making group, in
deciding how to allocate resources and in assessing performance.
The Companys chief operating decision making group is the
Board of Directors of the Company.

Prior to January 1, 2002, the Company
reported one segment, Healthcare Services. The Company did not
have any products or services which met the quantitative or
qualitative guidelines for segment reporting through
December 31, 2001. Effective January 1, 2002, the
Company has three reportable segments based on qualitative
guidelines. The Companys three segments are:
(1) Healthcare Recovery Services, which encompasses its
healthcare recovery products: healthcare subrogation, provider
bill audit and overpayment recoveries; (2) Property and
Casualty Recovery Services, which includes subrogation recovery
services for property and casualty insurers, which the Company
sells under the name TransPaC Solutions; and (3) Software,
which includes the sale of subrogation recovery software in a
browser-based application service provider (ASP) form. The
segment profit measure is income before income taxes.

Segment results for the three months ended
March 31, 2002 and 2001 are as follows (in thousands):

|                         |                                         |                        |   |        |        |  |   |        |        | 
|------------------------ | --------------------------------------- | ---------------------- | - | ------ | ------ |  | - | ------ | ------ | 
|                         |                                         |                       
|                         |                                         | Three Months Ended    
|                         |                                         | March 31,             
|                         |                                         |                       
|                         |                                         | 2002                   |   | 2001  
|                         |                                         |                        |   |       
|Revenues:                |                                         |                        |   |        |        |  |   |       
|                         | Healthcare Recovery Services            |                        | $ | 17,402 |        |  | $ | 16,221 |       
|                         | Property and Casualty Recovery Services |                        |   | 67     |        |  |   | 34     |       
|                         | Software                                |                        |   | 115    |        |  |   |       |       
|                         | Elimination of intercompany revenue     |                        |   | (115   | )      |  |   |       |       
|                         |                                         |                        |   |        |        |  |   |       
|                         |                                         | Total revenues         |   | $      | 17,469 |  |   | $      | 16,255 | 
|                         |                                         |                        |   |        |        |  |   |       
|Operating income (loss): |                                         |                        |   |        |        |  |   |       
|                         | Healthcare Recovery Services            |                        | $ | 7,173  |        |  | $ | 6,044  |       
|                         | Property and Casualty Recovery Services |                        |   | (293   | )      |  |   | (238   | )     
|                         | Software                                |                        |   | (160   | )      |  |   | (298   | )     
|                         | Unallocated Corporate support expenses  |                        |   | (3,921 | )      |  |   | (3,206 | )     
|                         |                                         |                        |   |        |        |  |   |       
|                         |                                         | Total operating income |   | $      | 2,799  |  |   | $      | 2,302  | 
|                         |                                         |                        |   |        |        |  |   |       

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TROVER SOLUTIONS, INC.


NOTES TO CONDENSED FINANCIAL
STATEMENTS  (Continued)

|                                   |                                                                 |                                     |   |        |       |  |   |        |       | 
|---------------------------------- | --------------------------------------------------------------- | ----------------------------------- | - | ------ | ----- |  | - | ------ | ----- | 
|                                   |                                                                 |                                    
|                                   |                                                                 | Three Months Ended                 
|                                   |                                                                 | March 31,                          
|                                   |                                                                 |                                    
|                                   |                                                                 | 2002                                |   | 2001  
|                                   |                                                                 |                                     |   |       
|Depreciation and amortization:     |                                                                 |                                     |   |        |       |  |   |       
|                                   | Healthcare Recovery Services                                    |                                     | $ | 1,118  |       |  | $ | 1,446  |      
|                                   | Property and Casualty Recovery Services                         |                                     |   | 28     |       |  |   | 11     |      
|                                   | Software                                                        |                                     |   | 13     |       |  |   | 19     |      
|                                   | Unallocated Corporate depreciation and
    amortization expense |                                     |   | 130    |       |  |   | 109    |      
|                                   |                                                                 |                                     |   |        |       |  |   |       
|                                   |                                                                 | Total depreciation and amortization |   | $      | 1,289 |  |   | $      | 1,585 | 
|                                   |                                                                 |                                     |   |        |       |  |   |       
|Income (loss) before income taxes: |                                                                 |                                     |   |        |       |  |   |       
|                                   | Healthcare Recovery Services                                    |                                     | $ | 7,183  |       |  | $ | 6,174  |      
|                                   | Property and Casualty Recovery Services                         |                                     |   | (301   | )     |  |   | (242   | )    
|                                   | Troveris Software                                               |                                     |   | (189   | )     |  |   | (303   | )    
|                                   | Unallocated Corporate (loss)                                    |                                     |   | (3,965 | )     |  |   | (3,280 | )    
|                                   |                                                                 |                                     |   |        |       |  |   |       
|                                   |                                                                 | Total income before income taxes    |   | $      | 2,728 |  |   | $      | 2,349 | 
|                                   |                                                                 |                                     |   |        |       |  |   |       

Unallocated Corporate amounts include corporate
expenses and other miscellaneous charges. Because this category
includes a variety of miscellaneous items not attributable to
one particular segment, it is subject to fluctuation on a
quarterly and annual basis. The Company does not allocate assets.

12.     Cost in
Excess of Net Assets Acquired and Other Intangible
Assets

Effective January 1, 2002, the Company
adopted FAS 142 under which Cost in Excess of Net Assets
Acquired is no longer amortized but instead will be assessed for
impairment at least annually which is a two step process. The
first step involves determining the estimated fair value of each
reporting unit with a view to determining whether the Cost in
Excess of Net Assets Acquired value has been impaired under FAS
142. In accordance with the transition provisions of FAS 142,
the Company is in the process of performing step one, and this
evaluation will be completed by June 30, 2002. The second
step measures the amount of the impairment, if any, and is
required to be completed as soon as possible upon completing the
first step, but no later than December 31, 2002.

Following is a reconciliation of previously
reported financial information to pro forma amounts excluding
amortization of Cost in Excess of Net Assets Acquired for the
quarter ended March 31, 2001 (in thousands, except per
share amounts):

|                                                                       |                     |                 |       |       |  |   |       |       | 
|---------------------------------------------------------------------- | ------------------- | --------------- | ----- | ----- |  | - | ----- | ----- | 
|                                                                       |                     |                
|                                                                       |                     | Three Months   
|                                                                       |                     | Ended March 31,
|                                                                       |                     |                
|                                                                       |                     | 2002            |       | 2001 
|                                                                       |                     |                 |       |      
|Net income:                                                            |                     |                 |       |       |  |   |       |      
|Net income as reported                                                 |                     | $               | 1,691 |       |  | $ | 1,375 |      
|Amortization of costs in excess of net assets
    acquired, net of tax |                     |                 |      |       |  |   | 236   |      
|                                                                       |                     |                 |       |       |  |   |       |      
|                                                                       | Adjusted net income |                 | $     | 1,691 |  |   | $     | 1,611 | 
|                                                                       |                     |                 |       |       |  |   |       |      
|Earnings per share (basic and diluted):                                |                     |                 |       |       |  |   |       |      
|Earnings per share as reported                                         |                     | $               | 0.17  |       |  | $ | 0.14  |      
|Amortization of costs in excess of net assets
    acquired, net of tax |                     |                 |      |       |  |   | 0.02  |      
|                                                                       |                     |                 |       |       |  |   |       |      
|Earnings per common share (basic and diluted)                          |                     | $               | 0.17  |       |  | $ | 0.16  |      
|                                                                       |                     |                 |       |       |  |   |       |      

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TROVER SOLUTIONS, INC.


NOTES TO CONDENSED FINANCIAL
STATEMENTS  (Continued)

The carrying value of Cost in Excess of Net
Assets Acquired, net was approximately $29.1 million at
March 31, 2002.

All of the Companys intangible assets
(other than Cost in Excess of Net Assets Acquired, net) are
subject to amortization. The details of the Companys
intangible assets at March 31, 2002 and December 31,
2001 are as follows (in thousands):

|                       |       |                |       |                   |  |     |       |       |  |              |       |       |  |   |       |       |  |   |     |       |  |   |       |       | 
|---------------------- | ----- | -------------- | ----- | ----------------- |  | --- | ----- | ----- |  | ------------ | ----- | ----- |  | - | ----- | ----- |  | - | --- | ----- |  | - | ----- | ----- | 
|                       |       |                |       |                  
|                       |       | March 31, 2002 |       | December 31, 2001
|                       |       |                |       |                  
|                       |       |                |       | Accumulated       |  |     |       |       |  | Accumulated  |       |      
|                       |       | Cost           |       | Amortization      |  | Net |       | Cost  |  | Amortization |       | Net  
|                       |       |                |       |                   |  |     |       |       |  |              |       |      
|Client lists           |       | $              | 4,900 |                   |  | $   | 1,027 |       |  | $            | 3,873 |       |  | $ | 4,900 |       |  | $ | 945 |       |  | $ | 3,955 |      
|Backlog                |       |                | 570   |                   |  |     | 361   |       |  |              | 209   |       |  |   | 570   |       |  |   | 333 |       |  |   | 237   |      
|Non-compete agreements |       |                | 530   |                   |  |     | 380   |       |  |              | 150   |       |  |   | 530   |       |  |   | 350 |       |  |   | 180   |      
|                       |       |                |       |                   |  |     |       |       |  |              |       |       |  |   |       |       |  |   |     |       |  |   |       |      
|                       | Total |                | $     | 6,000             |  |     | $     | 1,768 |  |              | $     | 4,232 |  |   | $     | 6,000 |  |   | $   | 1,628 |  |   | $     | 4,372 | 
|                       |       |                |       |                   |  |     |       |       |  |              |       |       |  |   |       |       |  |   |     |       |  |   |       |      

Client lists are being amortized on a
straight-line basis over 15 years. Backlog is being
amortized over 5 years on a straight-line basis.
Non-compete agreements are being amortized on a straight-line
basis over periods ranging from 4 years to 5 years.

Amortization expense related to intangible assets
for the period ended March 31, 2002 was approximately
$140,000. Over the nine month period ended December 31,
2002 and each of the four succeeding fiscal years, amortization
expense related to intangible assets is expected to be as
follows (in thousands):

|                                          |  |   |     | 
|----------------------------------------- |  | - | --- | 
|Nine month period ended December 31, 2002 |  | $ | 422 | 
|Year ended December 31,:                  |  |   |     | 
|2003                                      |  |   | 496 | 
|2004                                      |  |   | 340 | 
|2005                                      |  |   | 327 | 
|2006                                      |  |   | 327 | 

13.     Subsequent
Event

The Companys largest client is UnitedHealth
Group (UHG). For the three month periods ended March 31,
2002 and 2001, UHG generated 26% and 27% of the Companys
revenues, respectively. Recently, the Company was informed by
UHG management that UHG intends to terminate the Companys
subrogation services with respect to all but approximately
1 million lives of the 9.7 million remaining lives
attributable to UHG. UHGs termination of these services
resulted from its decision to bring subrogation recovery
services back inside UHG, where they will be performed by its
Ingenix strategic business unit. The Company expects to receive
monthly termination notices from UHG over a six-month period,
commencing April 30, 2002, with termination dates effective
180 days after each notice. The Company expects that it
will continue to recover on the backlog that it has created for
UHG (and for the plans and employer groups that UHG services), a
process that will not be completed for 5 to 6 years. See
Item 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations 
Concentration of Clients.

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Item 2.     Managements
Discussion and Analysis of Financial Condition and Results of
Operations

The Company believes it is a leading independent
provider of outsourcing of subrogation and certain other medical
claims recovery and cost containment services to the private
healthcare payor industry in the United States, based on the
Companys experience and assessment of its market. The
Companys primary business is medical claims recovery and
its primary product is subrogation recovery, which generally
entails the identification, investigation and recovery of
accident-related medical benefits incurred by its clients on
behalf of their insureds, but for which other persons or
entities have primary responsibility. The Companys
clients rights to recover the value of these medical
benefits, arising by law or contract, are known generally as the
right of subrogation and are generally paid from the proceeds of
liability or workers compensation insurance. The
Companys other medical claims recovery services include
(1) the auditing of the bills of medical providers,
particularly hospitals, for accuracy, correctness and compliance
with contract terms (provider bill audit), and
(2) the recovery of overpayments attributable to duplicate
payments, failures to coordinate benefits and similar errors in
payment. The Company offers its healthcare recovery services on
a nationwide basis to health maintenance organizations
(HMOs), indemnity health insurers, self-funded
employee health plans, companies that provide claims
administration services to self-funded plans (referred to as
third-party administrators), Blue Cross and Blue
Shield organizations and provider organized health plans.
Current clients include UnitedHealth Group, Humana Inc., Kaiser
Permanente, The Principal Financial Group and Group Health, Inc.
The Company had 46.4 million and 50.8 million lives
under contract from its clientele at March 31, 2002 and
2001, respectively.

The Company has three segments:
(1) Healthcare Recovery Services, which encompasses its
healthcare recovery products: healthcare subrogation, provider
bill audit and overpayment recoveries; (2) Property and
Casualty Recovery Services, which includes subrogation recovery
services for property and casualty insurers, which the Company
sells under the name TransPaC Solutions; and (3) Software,
which includes the sale of subrogation recovery software in a
browser-based application service provider (ASP) form.

Healthcare Recovery Services



| |                       
| | ----------------------
| | Overview of Operations

For a typical new healthcare subrogation or other
medical claims recovery client, it takes up to six months from
the contract signing (when the lives are sold) to
complete the construction of electronic data interfaces
necessary for the Company to begin providing service. At this
point, the client is considered installed. During
the installation period, the Company must also hire and train
quality staff necessary to provide contractual services. After
installation, the Company receives files and data from the
client from which it creates an inventory of backlog.

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

For the most part, the Company is paid
contingency fees from the amount of claims recoveries it makes
from backlog or recoveries it identifies through other cost
containment and related recovery services on behalf of its
clients. The Companys revenues are a function of
recoveries and effective fee rates. Effective fee rates vary
depending on the mix between services provided and client fee
schedules. The fee schedules for each client are separately
negotiated and reflect the Companys standard fee rates,
the services to be provided and the anticipated volume of
services. The Company grants volume discounts and, for its
recovery services, negotiates a lower fee when it assumes
backlog from a client because the client will have already
completed

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##### Table of Contents



some of the recovery work. Because the Company
records expenses as costs are incurred and records revenues only
when a file is settled, there is a lag between the recording of
expenses and related revenue recognition.


The Companys expenses are determined
primarily by the number of employees directly engaged in
recovery activities (cost of services) and by the
number of employees engaged in a variety of support activities
(support expenses). Recovery personnel must be hired
and trained in advance of the realization of recoveries and
revenues. Historically, support expenses have not grown in
direct proportion to revenues.



| |                      
| | ---------------------
| | Results of Operations

The following tables present certain key
operating indicators for the Healthcare Recovery Services
segment for the periods indicated (lives and dollars in
millions):

Healthcare Recovery Services-Key Operating
Indicators

|                                                         |  |                    |         |      |  |   |         |  
|-------------------------------------------------------- |  | ------------------ | ------- | ---- |  | - | ------- | -
|                                                         |  |                   
|                                                         |  | Three Months Ended
|                                                         |  | March 31,         
|                                                         |  |                   
|                                                         |  | 2002               |         | 2001
|                                                         |  |                    |         |     
|Cumulative lives sold, beginning of period               |  |                    | 49.1    |      |  |   | 52.5    |  
|Lives from existing client loss, net(1)                  |  |                    | (3.9    | )    |  |   | (2.8    | )
|Lives added from new contracts with existing
    clients |  |                    | 0.7     |      |  |   | 0.4     |  
|Lives added from contracts with new clients              |  |                    | 0.5     |      |  |   | 0.7     |  
|                                                         |  |                    |         |      |  |   |         |  
|Cumulative lives sold, end of period                     |  |                    | 46.4    |      |  |   | 50.8    |  
|                                                         |  |                    |         |      |  |   |         |  
|Lives installed, end of period                           |  |                    | 44.7    |      |  |   | 47.8    |  
|Backlog(2)                                               |  | $                  | 1,384.4 |      |  | $ | 1,207.3 |  
|Claims recoveries                                        |  | $                  | 64.0    |      |  | $ | 60.5    |  
|Throughput(3)                                            |  |                    | 4.6     | %    |  |   | 5.1     | %
|Effective fee rate                                       |  |                    | 27.5    | %    |  |   | 26.8    | %
|Claims revenues                                          |  | $                  | 17.4    |      |  | $ | 16.2    |  



---



|    |                                                                                                                                                                                                                                                                                                      
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Represents the net of: losses from contract
    terminations and organic declines in the clients installed
    base measured in the number of persons covered by clients; and
    gains from organic growth in the clients installed base
    measured in the number of persons covered by clients.
|   
|(2) | Backlog is the total dollar amount of potentially
    recoverable claims that the Company is pursuing or auditing on
    behalf of its clients at a given point in time.                                                                                                                             
|   
|(3) | Throughput equals claims recoveries for the
    period divided by the average of backlog at the beginning and
    end of the period.                                                                                                                                                                 



| |                                                                                    
| | -----------------------------------------------------------------------------------
| | Three Months Ended March 31, 2002
    Compared to Three Months Ended March 31, 2001

Claims Revenues.Total Healthcare Recovery Services revenues for the quarter
ended March 31, 2002 increased approximately
$1.2 million, or 7.3%, to $17.4 million compared to
$16.2 million for the quarter ended March 31, 2001.
Healthcare claims recoveries for the quarter ended
March 31, 2002 were $64.0 million, an increase of
$3.5 million, or 5.8%, compared to $60.5 million for
the same quarter of 2001.

The Healthcare Recovery Service effective fee
rate for the quarter ended March 31, 2002 increased to
27.5% from 26.8% for the same quarter of 2001. The increase in
fee rate was primarily attributable to the increase in the fee
charged to UnitedHealth Group in the first quarter of 2002. See
Concentration of Clients.

Backlog for the Healthcare Recovery Services
segment increased to $1,384.4 million at March 31, 2002
from $1,207.3 million at March 31, 2001, an increase
of 14.7%. Approximately $151 million of the increase

12



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##### Table of Contents



came from the provider bill audit services
backlog while the remainder came from the subrogation services
backlog.


The Healthcare Recovery Services segment had a
throughput rate of approximately 4.6% and 5.1% of average
backlog during the first quarter of 2002 and 2001, respectively.
The decrease in throughput from the quarter ended March 31, 2001
is primarily due to the fact that average healthcare recovery
services backlog during the 2002 quarter increased 17.2% from
the same quarter of 2001 while recoveries increased only 5.8%.
Lives installed decreased 3.1 million from
47.8 million at March 31, 2001 to 44.7 million at
March 31, 2002 because of the lives lost relating to
terminations by UnitedHealth Group. See Concentration of
Clients.

Cost of Services.Cost of services for the Healthcare
Recovery Services segment increased 6.6% for the quarter ended
March 31, 2002 to $8.1 million, from $7.6 million
for the same quarter in 2001. As a percentage of claims
revenues, cost of services decreased to 46.8% for the quarter
ended March 31, 2002 compared to 47.1% for the same quarter
in 2001, due to the increase in revenue described above.

Support Expenses.Support expenses for the Healthcare
Recovery Services segment decreased 9.1% to $1.0 million
for the quarter ended March 31, 2002 from $1.1 million
for the same quarter in 2001. Support expenses decreased as a
percentage of claims revenues from 6.7% for the first quarter of
2001 to 5.6% for the same quarter in 2002. The decrease in
support expenses as a percentage of claims revenues resulted
from the change in the reporting structure of certain systems
support personnel from the Healthcare Recovery Services segment
to Corporate Sales & Marketing. Prior to January 1,
2002, those personnel performed support functions primarily
related to healthcare subrogation. Effective January 1,
2002, such personnel moved under Corporate Sales & Marketing
as they assumed a more active role in the management of client
data and as members of the client solutions team. Prior year
amounts have not been reclassified as management of the Company
viewed this as a change in position.

Property and Casualty Recovery
Services

Overview of
Operations

The Company operates in the subrogation
outsourcing market that serves property and casualty
(P&C) insurers. The Company offers its services
to the P&C market under the brand name TransPaC
Solutions. The Company currently provides subrogation
outsourcing services to 21 P&C clients, under various
contractual arrangements, including closed claims studies,
referrals and full outsourcing. The Company has established a
full-time direct sales force of three individuals experienced in
P&C sales and marketing. The Companys target market
for its P&C subrogation services is P&C insurers that
have reported below average subrogation recovery results, are
small regional insurers or for various other reasons are
interested in outsourcing either all or a portion of their
subrogation work.

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

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

The Company has assessed the competitive
environment for P&C subrogation outsourcing, and believes
that the competition is fragmented and characterized by claims
adjusting companies that operate on a local or

13



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##### Table of Contents



regional basis and law firms that specialize in
low volume, but legally complex, subrogation claims. The Company
has identified only one competitor that attempts to serve a
national market. It believes that this competitor has enjoyed
limited success because it is owned and controlled by a P&C
insurer.


The Company previously disclosed that it expected
the following from TransPaC Solutions for the year ended
December 31, 2002: pretax income (loss) in 2002 to range
from a pretax loss of approximately $0.2 million to pretax
income of approximately $0.2 million; recoveries from
TransPaC Solutions to be $7.5 million to
$10.0 million; and revenues to be $1.9 million to
$2.5 million. The Company now estimates that it will incur
pretax losses between $0.8 million and $1.0 million;
recoveries will be from $5.0 million to $6.0 million;
and revenue will range from $1.2 million to
$1.5 million. The Company cautions that the foregoing
forecasts and estimates are not guarantees of future performance
and that actual results of TransPaC Solutions will be dependent
upon future facts and circumstances, many of which are outside
the control of management of the Company. See Safe Harbor
Compliance Statement for Forward Looking Statements
included as Exhibit 99.1 to the Companys Annual
Report on Form 10-K for the fiscal year ended
December 31, 2001, as amended by Exhibit 99.2 to this
Quarterly Report on Form 10-Q, which is hereby incorporated
herein by reference.

Results of
Operations

The following tables present certain key
operating indicators for the Property and Casualty Recovery
Services segment for the periods indicated (dollars in millions):

Property and Casualty Recovery Services-Key
Operating Indicators

|                                        |  |                    |    |      |  |  |   | 
|--------------------------------------- |  | ------------------ | -- | ---- |  |  | - | 
|                                        |  |                   
|                                        |  | Three Months Ended
|                                        |  | March 31,         
|                                        |  |                   
|                                        |  | 2002               |    | 2001
|                                        |  |                    |    |     
|Contracts in Force, beginning of period |  |                    | 14 |      |  |  | 2 | 
|Outsourcing(1)                          |  |                    |   |      |  |  |  | 
|Referrals/ Closed Claims(2)             |  |                    | 7  |      |  |  |  | 
|                                        |  |                    |    |      |  |  |   | 
|Contracts in Force, end of period       |  |                    | 21 |      |  |  | 2 | 
|                                        |  |                    |    |      |  |  |   | 



---



|    |                                                                                                                                                                                                          
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Outsourcing refers to the full replacement of a
    clients internal subrogation recovery function by TransPaC
    Solutions, typically with a view to an ongoing relationship of
    indefinite period.
|   
|(2) | Referrals and Closed Claims refer to
    project-related work assumed by TransPaC Solutions, typically
    with files transmitted by clients from time to time.                                          

|                   |  |                    |      |      |  |   |      |  
|------------------ |  | ------------------ | ---- | ---- |  | - | ---- | -
|                   |  |                   
|                   |  | Three Months Ended
|                   |  | March 31,         
|                   |  |                   
|                   |  | 2002               |      | 2001
|                   |  |                    |      |     
|Backlog(1)         |  | $                  | 7.0  |      |  | $ | 2.5  |  
|Claims recoveries  |  | $                  | 0.3  |      |  | $ | 0.1  |  
|Throughput(2)      |  |                    | 5.3  | %    |  |   | 3.2  | %
|Effective fee rate |  |                    | 23.8 | %    |  |   | 31.6 | %
|Claims revenues    |  | $                  | 0.07 |      |  | $ | 0.03 |  



---



|    |                                                                                                                                                             
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Backlog is the total dollar amount of potentially
    recoverable claims that the Company is pursuing on behalf of its
    clients at a given point in time.
|   
|(2) | Throughput equals claims recoveries for the
    period divided by the average of backlog at the beginning and
    end of the period.                        

14



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##### Table of Contents





| |                                                                                    
| | -----------------------------------------------------------------------------------
| | Three Months Ended March 31, 2002
    Compared to Three Months Ended March 31, 2001

Claims Revenues.Total Property and Casualty Recovery
Services revenues for the quarter ended March 31, 2002
increased approximately $33,000, or 97.1%, from the same quarter
in 2001. Property and Casualty Recovery Services claims
recoveries for the quarter ended March 31, 2002 were
$0.3 million, an increase of $0.2 million over the
same quarter in 2001.

The Property and Casualty Recovery Services
effective fee rate for the quarter ended March 31, 2002
decreased to 23.8% from 31.6% for the same quarter of 2001. The
decrease in fee rate was primarily attributable to the new
closed claim and referral contracts that the Company added in
the first quarter of 2002 which typically bear a lower fee rate
than full outsourcing contracts.

Backlog.Backlog for
the Property and Casualty Recovery Services segment increased to
$7.0 million at March 31, 2002 from $2.5 million
at March 31, 2001 due to additional contracts entered into
by the Company during the quarter ended March 31, 2002.

The Property and Casualty Recovery Services
segment had a throughput rate of approximately 5.3% and 3.2% of
average backlog during the first quarter of 2002 and 2001,
respectively. The increase in throughput from the quarter ended
March 31, 2001 is due to claims recoveries increasing at a
higher rate than the average backlog. Contracts in force
increased by 19 from March 31, 2001 to March 31, 2002.

Cost of Services.Cost of services for the Property and
Casualty Recovery Services segment increased 100% for the
quarter ended March 31, 2002 to $0.2 million, from
$0.1 million for the same quarter in 2001. As a percentage
of claims revenues, cost of services increased to 340% for the
quarter ended March 31, 2002 compared to 297% for the same
quarter in 2001. The increase in cost of services is due to
expenses being incurred prior to revenue being recognized, as is
the nature of the subrogation business.

Support Expenses.Support expenses for the Property and
Casualty Recovery Services segment decreased 50% to
$0.1 million for the quarter ended March 31, 2002 from
$0.2 million for the same quarter in 2001. Support expenses
decreased as a percentage of claims revenues from 471% for the
first quarter of 2001 to 155% for the same quarter in 2002. The
decrease in support expenses as a percentage of claims revenues
resulted from the movement of certain sales and marketing
personnel from the Property and Casualty Services segment to
Corporate Sales & Marketing.

Software



| |                       
| | ----------------------
| | Overview of Operations

The Company has developed a web-enabled
subrogation software application. The Company intends to sell
this product as an application service provider
(ASP), under the trade name Troveris, to
participants in both the health insurance and benefits market
and the P&C market which historically have not outsourced
subrogation recoveries. The Company currently estimates that 40%
to 50% of the private health insurance and health benefits
markets do not outsource subrogation recoveries. Public sector
markets, such as Medicaid and Medicare, have virtually no
outsourcing of subrogation recoveries. These programs typically
rely on their claims administration contractors to provide
subrogation services as part of a bundled service contract. Like
the health insurance market, the Company believes that certain
participants in the P&C insurance market are less likely to
outsource subrogation services. The Company believes mutual
insurers have organizational and cultural biases against
outsourcing and larger P&C insurers have sufficient
resources to develop relatively sophisticated internal
departments. As of March 31, 2002, the Company had not yet
sold either the health insurance application or the P&C
application, although the Company has received indications of
interest from potential purchasers.

The Troveris marketing strategy combines the
opportunity for an internal subrogation department to gain
operating efficiency through the functionality of
state-of-the-art desktop software and to leverage its ability to
produce recoveries through the purchase of unbundled components
of the Companys traditional subrogation outsourcing
services. The Troveris software application allows the Company
to administer these customized relationships using the same
proprietary processes as it uses for those customers who
purchase turnkey

15



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##### Table of Contents



subrogation outsourcing services. An additional
benefit of the Troveris software application is that the Company
believes that it will substantially reduce future expenses for
maintaining software applications that it uses to provide
turnkey outsourcing services.


During the fourth quarter of 2001, the Company
began migrating its own subrogation operations to the Troveris
application. The Company currently expects the migration to be
completed in the fourth quarter of 2002. At that time, the
Company expects to abandon its legacy subrogation system,
thereby reducing its technology expense, net of the expense of
maintaining the Troveris application, by at least $600,000 per
year. The Troveris application will also enable the Company to
expand its ability to manage its knowledge workers via
telecommuting arrangements. While the Company believes it can
achieve the foregoing transition and corresponding reduction of
expenses in the outlined timeframe, future facts and
circumstances could change these estimates. See Safe
Harbor Compliance Statement for Forward-Looking Statements
included as Exhibit 99.1 to the Companys Annual
Report on Form 10-K for the fiscal year ended
December 31, 2001, as amended by Exhibit 99.2 to this
Quarterly Report on Form 10-Q, which is hereby incorporated
herein by reference.

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



| |                      
| | ---------------------
| | Results of Operations



| |                                                                                    
| | -----------------------------------------------------------------------------------
| | Three Months Ended March 31, 2002
    Compared to Three Months Ended March 31, 2001

Revenues.The
Software segment recognized $115,000 in revenue in the first
quarter of 2002, all of which was derived internally.

Cost of services.Cost of services for the Software segment for the quarter ended
March 31, 2002 was approximately $115,000. This includes
approximately $81,000 of depreciation and amortization of
software in service. Approximately $34,000 of the cost of
services relates to the support and maintenance of the software.

Support expenses.The Software segment incurred approximately $401,000 in
expenditures in connection with the creation of new products for
the insurance industry. Approximately $254,000 of support
expenditures were capitalized, resulting in net reported
expenses of approximately $147,000.

Research and
Development.The Company expects to
incur additional expenses of between $0.8 million and
$1.2 million for research and development with respect to
these products over the remainder of 2002, of which
approximately $348,000 is expected to be capitalized. In
addition, as of March 31, 2002, the Company has capitalized
approximately $1.5 million of costs in accordance with
accounting principles generally accepted in the United States of
America for the development of software for sale to unrelated
parties.

16



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##### Table of Contents



Entire Company

Statements of Income as a Percentage of
Revenues

|                               |  |                    |       |      |  |  |       |  
|------------------------------ |  | ------------------ | ----- | ---- |  |  | ----- | -
|                               |  |                   
|                               |  | Three Months Ended
|                               |  | March 31,         
|                               |  |                   
|                               |  | 2002               |       | 2001
|                               |  |                    |       |     
|Claims revenues                |  |                    | 100.0 | %    |  |  | 100.0 | %
|Cost of services               |  |                    | 48.6  |      |  |  | 47.6  |  
|Support expenses               |  |                    | 28.0  |      |  |  | 27.7  |  
|Depreciation and amortization  |  |                    | 7.4   |      |  |  | 9.8   |  
|Research and development       |  |                    |      |      |  |  | 0.8   |  
|Operating income               |  |                    | 16.0  |      |  |  | 14.2  |  
|Interest (expense) income, net |  |                    | (0.4  | )    |  |  | 0.3   |  
|Income before income taxes     |  |                    | 15.6  |      |  |  | 14.5  |  
|Net income                     |  |                    | 9.7   |      |  |  | 8.5   |  

Depreciation and Amortization.Depreciation and amortization expense
decreased 18.7% to $1.3 million for the quarter ended
March 31, 2002 from $1.6 million for the same quarter in
2001. The decrease was due to the adoption of FAS 142 by the
Company on January 1, 2002. See Item 1.
Financial Statements (Unaudited) 
Note 12  Cost in Excess of Net Assets Acquired
and Other Intangible Assets.

Research and Development.The Company incurred $134,000 for the
quarter ended March 31, 2001, related to research and
development activities in connection with the creation of new
products for the insurance industry. See 
Software  Overview of Operations.

Interest Income.Interest income decreased 80.6%, or
$282,000, for the quarter ended March 31, 2002 as compared
to the same quarter in 2001. The decrease is due to the payment,
during the quarter ended June 30, 2001, of an earn-out
relating to an acquisition, reducing the restricted cash
balance, and lower interest rates.

Interest Expense.Interest expense totaled approximately
$139,000 for the quarter ended March 31, 2002. The decrease
in interest expense for the quarter ended March 31, 2002,
as compared with the same quarter in 2001, is due to a decrease
in borrowed funds and lower applicable interest rates during
2002.

Tax.In March 2002,
the Company accrued an income tax benefit of $95,000 related to
a research and experimental income tax credit. During the first
quarter of 2002, the Company accrued its income tax at its
historical rate of 41.5% of pretax income, net of the research
and experimental tax credit, resulting in an effective income
tax rate of 38.0%. For the first quarter of 2001, the provision
for income tax was accrued at 41.5% of pretax income.

Net Income.Net
income for the quarter ended March 31, 2002 increased
$0.3 million, or 23.0%, to $1.7 million, or $0.17 per
diluted common share, from $1.4 million or $0.14 per
diluted common share, for the comparable period in 2001. The
primary reason for the increase in net income and diluted
earnings per share was the adoption of FAS 142 as described
above under Depreciation and Amortization.

17



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##### Table of Contents



Liquidity and Capital Resources

The Companys statements of cash flows for
the three months ended March 31, 2002 and 2001 are summarized
below:

|                                                         |  |                    |        |      |  |   |       |  
|-------------------------------------------------------- |  | ------------------ | ------ | ---- |  | - | ----- | -
|                                                         |  |                   
|                                                         |  | Three Months Ended
|                                                         |  | March 31,         
|                                                         |  |                   
|                                                         |  | 2002               |        | 2001
|                                                         |  |                    |        |     
|                                                         |  |                   
|                                                         |  | (In thousands)    
|Net cash provided by operating activities                |  | $                  | 3,524  |      |  | $ | 1,269 |  
|Net cash used in investing activities                    |  |                    | (880   | )    |  |   | (725  | )
|Net cash (used in) provided by financing
    activities  |  |                    | (3,513 | )    |  |   | 31    |  
|                                                         |  |                    |        |      |  |   |       |  
|Net (decrease) increase in cash and cash
    equivalents |  | $                  | (869   | )    |  | $ | 575   |  
|                                                         |  |                    |        |      |  |   |       |  

The Company had working capital of
$8.9 million at March 31, 2002, including cash and
cash equivalents of $1.7 million, compared with working
capital of $10.4 million at December 31, 2001. The
primary reason for the decrease in working capital was the use
of excess cash and cash equivalents to pay down the Revolving
Credit Facility and to repurchase shares of the Companys
stock.

Net cash provided by operating activities was
$3.5 million, an increase of $2.3 million for the
three months ended March 31, 2002, compared to the same
quarter in 2001, primarily as a result of the reduction in the
accounts receivable balance during the 2002 quarter.

Net cash used in investing activities includes
purchases of property and equipment. During each of the three
month periods ended March 31, 2002 and 2001, the Company
capitalized approximately $0.5 million of
internally-developed software.

Net cash used in financing activities for the
three months ended March 31, 2002 reflects
$2.0 million in net cash payments with respect to the
Companys Revolving Credit Facility, as well as
approximately $1.6 million of treasury stock purchases.

On November 1, 2001, the Company entered
into a revolving credit facility with National City Bank of
Kentucky, Bank One Kentucky, N.A. and Fifth Third Bank (the
Revolving Credit Facility). The Companys
obligations under the Revolving Credit Facility are secured by
substantially all of the Companys assets, subject to
certain permitted exceptions. The Revolving Credit Facility
carries a maximum borrowing capacity of $40 million and
will mature October 31, 2004. Principal amounts outstanding
under the Revolving Credit Facility bear interest at a variable
rate based on the Prime Rate or Eurodollar Rate, as applicable,
plus a pre-determined fixed margin. At March 31, 2002, the
interest rate was 3.62% based on the one-month Eurodollar Rate.
The Revolving Credit Facility contains customary covenants and
events of default including, but not limited to, financial tests
for interest coverage, net worth levels and leverage that may
limit the Companys ability to pay dividends. It also
contains a material adverse change clause. At March 31,
2002, $6 million was outstanding under the Revolving Credit
Facility. (See Item 1. Financial Statements
(Unaudited)  Note 4  Credit Facility
and Note 10  Derivatives.)

At March 31, 2002 and December 31,
2001, the Company reported on its balance sheets, as a current
asset, restricted cash of $17.9 million and $18.0 million,
respectively. Restricted cash at March 31, 2002 and
December 31, 2001 represented claims recoveries by the
Company for its clients. At March 31, 2002 and
December 31, 2001, the Company reported on its balance
sheets, as a current liability, funds due clients of
$12.5 million and $12.9 million, respectively,
representing claims recoveries to be distributed to clients, net
of the fee earned on such recoveries.

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

18



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##### Table of Contents



External Factors

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

Moreover, because the Companys revenues are
derived from the recovery of the costs of medical treatment,
material changes in such costs will tend to affect the
Companys backlog or its rate of backlog growth, as well as
its revenue or its rate of revenue growth. The healthcare
industry, and particularly the business of healthcare payors, is
subject to various external factors that may have the effect of
significantly altering the costs of healthcare and the
environment for the sale or delivery of medical claims recovery
and cost containment services. The Company is unable to predict
which of these factors, if any, could have a potentially
material impact on healthcare payors and through them, the
healthcare recovery and cost containment industry.

Concentration of Clients

The Company provides services to healthcare plans
that as of March 31, 2002 covered approximately
46.4 million lives. The Companys clients are national
and regional healthcare payors, large third-party administrators
or self-insured corporations. The Company has two clients that
individually comprise more than 10% of the Companys
revenue. The Companys largest client is UnitedHealth Group
(UHG). For the three month periods ended
March 31, 2002 and 2001, UHG generated 26% and 27% of the
Companys revenues, respectively. Wellpoint Health Networks
accounted for 12.7% and 8.6% of the Companys revenues for
the quarters ended March 31, 2002 and 2001, respectively.

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

The Company performs its services on a reasonable
efforts basis and does not obligate itself to deliver any
specific result. Contracts with its customers are generally
terminable on 60 to 180 days notice by either party,
although in a few cases the contracts extend over a period of
years. The Companys contracts generally provide that in
the event of termination, the Company is entitled to complete
the recovery process on the existing backlog or to receive a
cash payment designed to approximate the gross margin that would
otherwise have been earned from the recovery on the backlog of
the terminating client. On March 31, 2002, the Company had
Healthcare Recovery Services backlog of $1,384.4 million.

Recently, the Company was informed by UHG
management that UHG intends to terminate the Companys
subrogation services with respect to all but approximately
1 million lives of the 9.7 million remaining lives
attributable to UHG. UHGs termination of these services
resulted from its decision to bring subrogation recovery
services back inside UHG, where they will be performed by its
Ingenix strategic business unit. The Company expects to receive
monthly termination notices from UHG over a six-month period,
commencing April 30, 2002, with termination dates effective
180 days after each notice. The Company expects that it
will continue to recover on the backlog that it has created for
UHG (and for the plans and employer groups that UHG services), a
process that will not be completed for 5 to 6 years. UHG is
the Companys largest client, accounting for 27% of its
total revenue in 2001.

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Based upon this information from UHG, the Company
stated that the effects of the loss of the prospective UHG
business, coupled with an increase in the fee rate that has
occurred, and without regard to replacement of the UHG business,
will be as follows:



| |   |                                                                                                                                                                                                                     
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | In 2002, the Healthcare Recovery Services segment
    will report $1.4 million to $1.6 million more in revenue
    and pretax income than was indicated in the guidance previously
    published on January 4, 2002;
|
| |  | In 2003, the subrogation product of the
    Healthcare Recovery Services segment will report approximately
    $1.8 million less in revenue, without any reduction in the
    gross margin percentage; and          
|
| |  | In 2004, the subrogation product of the
    Healthcare Recovery Services segment will report approximately
    $7.0 million less in revenue, without any reduction in the
    gross margin percentage.              

In addition, the Company expects that the
Healthcare Recovery Services segment will report
$0.3 million to $0.6 million more in pretax income
than was indicated in the 2002 guidance previously published on
January 4, 2002, which did not include the effects of the
UHG terminations.

Critical Accounting Policies

The Company has identified critical accounting
policies that, as a result of the judgments, uncertainties,
uniqueness and complexities of the underlying accounting
standards and operations involved, could result in material
changes to its financial condition or results of operations
under different conditions or using different assumptions. The
Company believes its most significant accounting policies are
related to the following areas, among others: revenue
recognition, accounts receivable and collectibility, valuation
of long-lived and intangible assets, accrued expenses and common
stock options. Details regarding the Companys use of these
policies and the related estimates are described more fully in
the Companys Annual Report on Form 10-K for the year
ended December 31, 2001, filed with the Securities and
Exchange Commission on March 27, 2002. During the first
quarter of 2002, there have been no material changes to the
Companys critical accounting policies that impacted the
Companys financial condition or results of operations.

Recently Issued Accounting
Pronouncements

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

Also, in June 2001, the FASB issued Statement of
Financial Accounting Standards No. 142 (FAS 142),
Goodwill and Other Intangible Assets, which
establishes the accounting for goodwill and other intangible
assets following their recognition. FAS 142 applies to all
goodwill and other intangible assets whether acquired singly, as
part of a group, or in a business combination. FAS 142
provides that goodwill should not be amortized but should be
tested for impairment annually using a fair-value based
approach. In addition, FAS 142 provides that other intangible
assets other than goodwill should be amortized over their useful
lives and reviewed for impairment. FAS 142 was effective
for the Company beginning on January 1, 2002. The Company
will now be required to perform a transitional impairment test
under FAS 142 for all goodwill recorded as of
January 1, 2002. Management of the Company has not
performed a transitional impairment test under FAS 142 and
accordingly cannot estimate the impact of the adoption of
FAS 142 as of March 31, 2002.

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

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

Stock Repurchase Plan

The Companys Board of Directors approved a
stock repurchase plan on March 12, 1999 under which the
Company is authorized to repurchase, from time to time, up to
$10 million of the Companys Common Stock in the open
market, at prices per share deemed favorable by the Company.
Shares may be repurchased using cash from operations and
borrowed funds and may continue until such time as the Company
has repurchased $10 million of the Companys Common
Stock or until it otherwise determines to terminate the stock
repurchase plan. The Company repurchased 280,493 shares of its
own stock during the three months ended March 31, 2002, at an
average price of $5.58. From inception of the program through
March 31, 2002, the total number of repurchased shares is
2,072,758 at a cost of $8.7 million, or an average cost of
$4.19 per share. All of the reacquired shares of Common Stock
through March 31, 2002 are reflected as treasury stock on
the accompanying Condensed Balance Sheets (Unaudited).

On May 10, 2002, the Companys Board of
Directors authorized the repurchase of up to an additional
$10 million of the Companys Common Stock pursuant to
the stock purchase plan.

Recent Developments



| |                        
| | -----------------------
| | Resignation of Director

Effective May 10, 2002, Herbert A. Denton
resigned as a director of the Company. Under the Companys
Certificate of Incorporation and Bylaws, a vacancy on the Board
of Directors created by a resignation may be filled by a
majority vote of the remaining directors. A director so chosen
to fill the vacancy would hold office until the next succeeding
Annual Meeting. The Board of Directors, through its Nominating
Committee, is currently engaged in identifying candidates for
the vacant position.




Item 3.     Quantitative
and Qualitative Disclosures About Market Risk

An element of market risk exists for the Company
from changes in interest rates related to its Revolving Credit
Facility, which matures October 31, 2004. The impact on
earnings and value of any debt on the Companys balance
sheets are subject to change as a result of movements in market
rates and prices as a portion of the Revolving Credit Facility
is subject to variable interest rates. However, the Company does
not expect changes in interest rates to have a material effect
on its financial position, results of operations or cash flows
in 2002. As of March 31, 2002, the Company had
$6.0 million outstanding under its Revolving Credit
Facility. Through the interest rate swap contract the Company
has entered into, the Company has fixed the interest rate on
$4 million of the Revolving Credit Facility at 5.41% or
5.66% (contingent on the status of a financial ratio). The
remaining $2 million outstanding had an interest rate of
3.62%. See Item 1. Financial Statements
(Unaudited)  Note 13  Subsequent
Event and Item 2. Managements Discussion
and Analysis of Financial Condition and Results of
Operations  Liquidity and Capital Resources.

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PART II     OTHER
INFORMATION




Item 1.     Legal
Proceedings

The Company is engaged in the business of
identifying and recovering subrogation and related claims of its
clients, many of which arise in the context of personal injury
lawsuits. As such, the Company operates in a
litigation-intensive environment. Moreover, management of the
Company has observed that, in parallel with widely-reported
legislative concerns with the healthcare payment system, there
also has occurred an increase in litigation, actual and
threatened, including class actions brought by nationally
prominent attorneys, directed at healthcare payors and related
parties.

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

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

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

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

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

Although the Company was not named as a defendant
in any of them, there have been three other lawsuits involving
the Companys clients that implicated the Companys
business practices. The complaints in these cases alleged, among
other things, violation of state law with respect to the payment
of plaintiffs attorneys fees and unfair trade
practices, violation of the federal Health Maintenance
Organization Act of 1973, misrepresentation of the rightful
amounts of subrogation claims, and impermissible enforcement of

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recovery rights. Two of these cases resulted in
judgments in favor of the Companys clients after
litigation of the merits before trial and appellate courts. The
other case was settled for an immaterial amount.


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

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

Current Litigation

Conte v.
Healthcare Recoveries

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

On November 5, 1999, the Company filed a
motion to dismiss the Amended Complaint. On June 29, 2001,
the court issued a decision dismissing plaintiffs common
law claims for fraud and unjust enrichment as well as
plaintiffs claims under the federal Fair Debt Collection
Practices Act and the Florida Consumer Collection Practices Act.
The court did not, however, dismiss the remaining count of the
Amended Complaint (Count I), which seeks a
declaratory judgment and damages under ERISA based on the
Companys alleged violation of the make whole
rule. The Company has now filed an answer with respect to Count
I of the Amended Complaint.

Plaintiffs motion to certify a nationwide
class, which the Company opposed, was submitted to the court in
September 2000. In an order entered January 8, 2002, the
court referred the class certification motion to the Chief
Magistrate Judge for a report and recommendation. In a report
dated March 20, 2002, the Chief Magistrate Judge
recommended denial of the motion to certify a class. Plaintiff
recently filed objections to the report and recommendation and
the Company is preparing a response to the plaintiffs
objections.

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Cajas et al.
v. Prudential Health Care Plan and Healthcare
Recoveries

On October 28, 1999, a class action
Plaintiffs Original Petition (Petition) was
filed against the Company and one of the Companys clients
in the District Court for the 150th Judicial District, Bexar
County, Texas, Joseph R. Cajas, on behalf of himself and all
others similarly situated v. Prudential Health Care Plan, Inc.
and Healthcare Recoveries, Inc.The plaintiff asserts that
the Companys subrogation recovery efforts on behalf of its
client Prudential Health Care Plan, Inc.
(Prudential) violated a number of common law duties,
as well as the Texas Insurance Code and the Texas Business and
Commerce Code. The Petition alleges that the Company, as the
subrogation agent for Prudential, made fraudulent
misrepresentations in the course of unlawfully pursuing
subrogation and reimbursement claims that plaintiffs assert are
unenforceable because (1) prepaid medical service plans may
not exercise rights of subrogation and reimbursement;
(2) the subrogation and reimbursement claims asserted by
the Company are not supported by contract documents that provide
enforceable recovery rights and/or do not adequately describe
the recovery rights; and (3) the sums recovered pursuant to
such claims unlawfully exceed the amount Prudential paid for
medical goods and services. The Company was served with the
Petition in early November 1999, and has answered, denying all
allegations. The court has not yet addressed the question of
whether to certify the putative class. On January 8, 2002,
the defendants filed a motion for summary judgment. That motion
has not yet been orally argued before the court.

Franks et al.
v. Prudential Health Care Plan and Healthcare
Recoveries

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

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

Martin et al.
v. Companion Health Care and Healthcare Recoveries

On December 22, 1999, a purported class
action complaint (Complaint) was filed against the
Company and one of the Companys clients in the Court of
Common Pleas of Richland County, South

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


Hamilton v.
Healthcare Recoveries

On March 12, 2001, a Complaint
(Complaint) was filed against the Company in the
United States District Court for the Eastern District of
Louisiana, in a putative class action brought by Kyle M.
Hamilton. In that action, Hamilton v. Healthcare Recoveries,
Inc.,No. 01-650, plaintiff asserts that the
Companys subrogation recovery efforts on behalf of its
clients violate certain Louisiana state laws, the federal Fair
Debt Collection Practices Act and the Louisiana Unfair Trade
Practices Act. The Complaint alleges that the Company
intentionally and negligently interfered with the
plaintiffs and the putative class members rights to
settle certain personal injury claims. The Complaint further
alleges that the Company unlawfully pursued subrogation and
reimbursement claims that plaintiff asserts are unenforceable
because the clauses in the Companys clients coverage
documents that create such recovery rights are rendered null and
void by Louisiana statutes that generally prohibit coordination
of benefits with individually underwritten insurance coverages.
Plaintiff purports to represent a class consisting of all
persons covered under group health policies that were issued or
delivered in the State of Louisiana and who received any
communication from the Company attempting to enforce any clauses
that allegedly were rendered null and void by Louisiana law.
Plaintiff seeks on behalf of the purported class compensatory
and statutory damages, interest, costs, attorneys fees and
such additional damages and relief as may be allowed by any
applicable law. On July 17, 2001, the court granted a
motion for summary judgment filed by the Company as concerned
the plaintiffs Fair Debt Collection Practices Act claim,
dismissing those claims with prejudice. The court denied the
Companys motion for summary judgment, without prejudice to
the right of the Company to reassert its motion, with respect to
the plaintiffs state law claims. The court ordered that
the parties submit memoranda addressing whether the court still
had subject matter jurisdiction, given dismissal of the federal
claim. On August 21, 2001, the court ruled that it lacked
subject matter jurisdiction, thus dismissing the remaining
claims, without prejudice. Plaintiff filed an appeal to the
United States Fifth Circuit Court of Appeals. The parties
completed appellate briefing in January 2002 and oral arguments
were heard on May 9, 2002.

In addition to filing the appeal in federal
court, the Hamiltonplaintiff on October 1, 2001
filed a new complaint in the Civil District Court for the Parish
of Orleans, Louisiana, in a putative class action styled
Hamilton v. Healthcare Recoveries, Inc.,2001-15989. This
state court action asserts claims substantially similar to those
in the federal court action. During November 2001, the Company
filed preliminary exceptions to this new complaint.

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Rogalla v.
Christie Clinic, PersonalCare Health Management and Healthcare
Recoveries

On December 14, 2001, Valerie Rogalla, the
plaintiff in a putative class action against a health care
provider, amended her complaint to add Healthcare Recoveries,
Inc. as a defendant in Valerie Rogalla v. Christie Clinic,
P.C., PersonalCare Health Management, Inc. and Healthcare
Recoveries, Inc.,No. 01-L-203, Circuit Court of the Sixth
Judicial Circuit, Champaign County, Illinois. In her complaint,
the plaintiff makes allegations on behalf of herself and all
others similarly situated. The complaint asserts that the
Company, as subrogation agent for PersonalCare Health
Management, made fraudulent misrepresentations in the course of
unlawfully pursuing subrogation and reimbursement claims. The
complaint seeks recovery from the Company for compensatory
damages, punitive damages and costs. The Company disputes the
plaintiffs allegations and intends to vigorously defend
its position in this case.

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

In terms of the Companys business practices
and the allegations underlying the Cajas, Franks,and
Martincases, at the end of 1993 the Company had ceased
the practice of recovering the reasonable value of
medical treatment provided by medical providers under DFS
arrangements with the Companys clients. From that date,
the Companys policy has been not to recover the
reasonable value of medical treatment in DFS
arrangements. However, the Company historically and currently
recovers the reasonable value of medical treatment
provided under capitation arrangements and other payment
arrangements with medical providers on behalf of those clients
that compensate medical providers under these payment
mechanisms, to the extent that these benefits are related to
treatment of the injuries as to which clients have recovery
rights. The Company believes that its clients contracts,
including the contracts that provide for recovery under DFS,
capitation and other payment arrangements are enforceable under
the laws potentially applicable in these cases. As a result, and
taking into account the underlying facts in each of these cases,
the Company believes it has meritorious grounds to defend these
lawsuits, it intends to defend the cases vigorously, and it
believes that the defense and ultimate resolution of the
lawsuits should not have a material adverse effect upon the
business, results of operations or financial condition of the
Company. Nevertheless, if any of these lawsuits or one or more
other lawsuits seeking relief under similar theories were to be
successful, it is likely that such resolution would have a
material adverse effect on the Companys business, results
of operations and financial condition.

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




Item 2.     Changes
in Securities and Use of Proceeds

On March 1, 2002, the Company granted 10,000
shares of restricted common stock to a new employee as an
inducement to the employee to enter into employment with the
Company pursuant to an exemption from registration under
Section 4(2) of the Securities Act of 1933.

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Item 6.     Exhibits
and Reports on Form 8-K

(a) Exhibits

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

| |    |    |  |   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | -- | -- |  | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 3  | .1 |  |  |  | Amended and Restated Certificate of Incorporation
    of the Registrant (incorporated by reference to Exhibit 3.1
    of Registrants Amendment No. 2 to Registration
    Statement on Form S-1, File No. 333-23287).                                                                                                                                                                                                                                                           
| | 3  | .2 |  |  |  | Amended and Restated Bylaws of the Registrant
    (incorporated by reference to Exhibit 3.2 of
    Registrants Annual Report on Form 10-K for the fiscal
    year ended December 31, 2000).                                                                                                                                                                                                                                                                                    
| | 4  | .1 |  |  |  | Specimen Common Stock Certificate (incorporated
    by reference to Exhibit 4.1 of Registrants Amendment
    No. 1 to Registration Statement on Form S-1, File
    No. 333-23287).                                                                                                                                                                                                                                                                                             
| | 4  | .2 |  |  |  | Rights Agreement, dated February 12, 1999,
    between the Registrant and National City Bank of Kentucky, as
    Rights Agent, which includes as Exhibit A the Form of
    Certificate of Designations of the Preferred Stock, as
    Exhibit B the Form of Right Certificate and as
    Exhibit C the Summary of Rights to Purchase Preferred Stock
    (incorporated by reference to Exhibit 4.1 of
    Registrants Form 8-A, filed February 16, 1999,
    File No. 0-22585).
| | 10 | .1 |  |  |  | Form of Severance Agreement between the
    Registrant and Douglas R. Sharps, Debra M. Murphy, Robert G.
    Bader and Robert L. Jefferson dated January 1, 2002.                                                                                                                                                                                                                                                                                                               
| | 99 | .1 |  |  |  | Trover Solutions, Inc. Private Securities
    Litigation Reform Act of 1995 Safe Harbor Compliance Statement
    for Forward-Looking Statements (incorporated by reference to
    Exhibit 99.1 of Registrants Annual Report on
    Form 10-K for the fiscal year ended December 31, 2001).                                                                                                                                                                                     
| | 99 | .2 |  |  |  | Amendment to Trover Solutions, Inc. Private
    Securities Litigation Reform Act of 1995 Safe Harbor Compliance
    Statement for Forward-Looking Statements.                                                                                                                                                                                                                                                                                                                   

(b) Reports on Form 8-K

|                                                                    |  |            |    |                |  |           |                  |  |  |  |                  | 
|------------------------------------------------------------------- |  | ---------- | -- | -------------- |  | --------- | ---------------- |  |  |  | ---------------- | 
|                                                                    |  | Financial  |    |                |  |          
|                                                                    |  | Statements |    |                |  |          
|Item Reported                                                       |  | Filed      |    | Date of Report |  | File Date
|                                                                    |  |            |    |                |  |          
|Item 5  Text of Guidance Release
    and   Slide Show Presentation |  |            | No |                |  |           | January 4, 2002  |  |  |  | January 7, 2002  | 
|Item 5  Text of Name Change
    Release                            |  |            | No |                |  |           | January 17, 2002 |  |  |  | January 17, 2002 | 

27



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##### Table of Contents






SIGNATURES

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



| |                       
| | ----------------------
| | TROVER SOLUTIONS, INC.

|                    |  |                                                                                                                                          
|------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------
|Date: May 15, 2002  |  | /s/ PATRICK B. MCGINNISPatrick B. McGinnisChairman, President and Chief Executive Officer                                                
|                   
|Dated: May 15, 2002 |  | /s/ DOUGLAS R. SHARPSDouglas R. SharpsExecutive Vice President and Chief Financial Officer
    Principal Financial and Accounting Officer

28