##### 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
    September 30, 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


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

Indicate by check mark whether the Registrant is
an accelerated filer (as defined in Rule 12b-2 of the
Exchange
Act).     Yes o          No þ

As of November 13, 2002, 8,781,817 shares of
the Registrants Common Stock, $0.001 par value, were
outstanding.



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TABLE OF CONTENTS



|                                              |                                                                                               |                                                                                                |  |  |  |  |  | 
|--------------------------------------------- | --------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------- |  |  |  |  |  | 
|INDEX                                        
|PART I: FINANCIAL INFORMATION                
|                                              | Item 1. Financial Statements (Unaudited)                                                     
|                                              |                                                                                               | CONDENSED BALANCE SHEETS                                                                      
|                                              |                                                                                               | CONDENSED STATEMENTS OF INCOME For the Three and Nine Months Ended September 30, 2002 and 2001
|                                              |                                                                                               | CONDENSED STATEMENTS OF CASH FLOWS For the Nine Months Ended September 30, 2002 and 2001      
|                                              |                                                                                               | NOTES TO CONDENSED FINANCIAL STATEMENTS                                                       
|                                              | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                              | Item 3. Quantitative and Qualitative Disclosures About Market Risk                           
|                                              | Item 4. Controls and Procedures                                                              
|PART II: OTHER INFORMATION                   
|                                              | Item 1. Legal Proceedings                                                                    
|                                              | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                                   
|Section 906 Certifications of the CEO and CFO



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##### Table of Contents



TROVER SOLUTIONS, INC.

FORM 10-Q

September 30, 2002







INDEX


|                                   |  |                                                                                                       |    |      |    | 
|---------------------------------- |  | ----------------------------------------------------------------------------------------------------- | -- | ---- | -- | 
|                                   |  |                                                                                                       |    | Page
|                                   |  |                                                                                                       |    |     
|PART I:  FINANCIAL
    INFORMATION
|Item 1.                            |  | Financial Statements (Unaudited)                                                                      |    |      | 1  | 
|                                   |  | Condensed Balance Sheets as of September 30,
    2002 and December 31, 2001                           |    |      | 1  | 
|                                   |  | Condensed Statements of Income for the three and
    nine months ended September 30, 2002 and 2001    |    |      | 2  | 
|                                   |  | Condensed Statements of Cash Flows for the nine
    months ended September 30, 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) |    |      | 12 | 
|Item 3.                            |  | Quantitative and Qualitative Disclosures About
    Market Risk                                        |    |      | 24 | 
|Item 4.                            |  | Controls and Procedures                                                                               |    |      | 24 | 
|PART II:  OTHER
    INFORMATION   
|Item 1.                            |  | Legal Proceedings                                                                                     |    |      | 25 | 
|Item 6.                            |  | Exhibits and Reports on Form 8-K                                                                      |    |      | 30 | 
|Signatures                         |  |                                                                                                       | 31 |     

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 THE TROVER SOLUTIONS, INC.
QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED
MARCH 31, 2002, 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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PART I:     FINANCIAL
INFORMATION






Item 1.     Financial
Statements (Unaudited)


TROVER SOLUTIONS, INC.






CONDENSED BALANCE SHEETS


(Unaudited)

(In thousands, except per share
information)


|                                           |                                                                                                                                                                            |                                            |        |              |        |  |        |        |        | 
|------------------------------------------ | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------ | ------------ | ------ |  | ------ | ------ | ------ | 
|                                           |                                                                                                                                                                            | September 30,                              |        | December 31,
|                                           |                                                                                                                                                                            | 2002                                       |        | 2001        
|                                           |                                                                                                                                                                            |                                            |        |             
|ASSETS                                    
|Current assets:                            |                                                                                                                                                                            |                                            |        |              |        |  |        |       
|                                           | Cash and cash equivalents                                                                                                                                                  |                                            | $      | 1,456        |        |  | $      | 2,547  |       
|                                           | Restricted cash                                                                                                                                                            |                                            |        | 17,563       |        |  |        | 18,035 |       
|                                           | Accounts receivable, less allowance for doubtful
    accounts of $494 at September 30, 2002 and $509 at
    December 31, 2001                                              |                                            |        | 9,761        |        |  |        | 9,382  |       
|Other current assets                       |                                                                                                                                                                            |                                            | 2,193  |              |        |  | 1,805  |       
|                                           |                                                                                                                                                                            |                                            |        |              |        |  |        |       
|                                           |                                                                                                                                                                            | Total current assets                       |        |              | 30,973 |  |        |        | 31,769 | 
|                                           |                                                                                                                                                                            |                                            |        |              |        |  |        |       
|Property and equipment, net                |                                                                                                                                                                            |                                            | 6,758  |              |        |  | 6,619  |       
|                                           |                                                                                                                                                                            |                                            |        |              |        |  |        |       
|Cost in excess of net assets acquired, net |                                                                                                                                                                            |                                            | 29,146 |              |        |  | 29,146 |       
|Identifiable intangibles, net              |                                                                                                                                                                            |                                            | 3,951  |              |        |  | 4,372  |       
|Other assets                               |                                                                                                                                                                            |                                            | 2,344  |              |        |  | 2,557  |       
|                                           |                                                                                                                                                                            |                                            |        |              |        |  |        |       
|                                           |                                                                                                                                                                            | Total assets                               |        | $            | 73,172 |  |        | $      | 74,463 | 
|                                           |                                                                                                                                                                            |                                            |        |              |        |  |        |       
|LIABILITIES AND STOCKHOLDERS
    EQUITY  
|Current liabilities:                       |                                                                                                                                                                            |                                            |        |              |        |  |        |       
|                                           | Trade accounts payable                                                                                                                                                     |                                            | $      | 2,296        |        |  | $      | 1,308  |       
|                                           | Accrued expenses                                                                                                                                                           |                                            |        | 3,794        |        |  |        | 3,612  |       
|                                           | Accrued bonuses                                                                                                                                                            |                                            |        | 1,927        |        |  |        | 2,239  |       
|                                           | Funds due clients                                                                                                                                                          |                                            |        | 12,542       |        |  |        | 12,876 |       
|                                           | Income taxes payable                                                                                                                                                       |                                            |        | 906          |        |  |        | 300    |       
|                                           | Deferred income tax liability                                                                                                                                              |                                            |        | 1,005        |        |  |        | 1,007  |       
|                                           |                                                                                                                                                                            |                                            |        |              |        |  |        |       
|                                           |                                                                                                                                                                            | Total current liabilities                  |        |              | 22,470 |  |        |        | 21,342 | 
|                                           | Other liabilities                                                                                                                                                          |                                            |        | 2,489        |        |  |        | 2,355  |       
|                                           | Long-term borrowings                                                                                                                                                       |                                            |        | 5,500        |        |  |        | 8,000  |       
|                                           |                                                                                                                                                                            |                                            |        |              |        |  |        |       
|                                           |                                                                                                                                                                            | Total liabilities                          |        |              | 30,459 |  |        |        | 31,697 | 
|                                           |                                                                                                                                                                            |                                            |        |              |        |  |        |       
|Commitments and contingencies              |                                                                                                                                                                            |                                            |       |              |        |  |       |       
|Stockholders equity:                      |                                                                                                                                                                            |                                            |        |              |        |  |        |       
|                                           | Preferred stock, $.001 par value per share; 2,000
    shares authorized; no shares issued or outstanding                                                                   |                                            |        |             |        |  |        |       |       
|                                           | Common stock, $.001 par value per share; 20,000
    shares authorized; 8,821 and 9,791 shares outstanding as of
    September 30, 2002 and December 31, 2001, respectively |                                            |        | 12           |        |  |        | 12     |       
|                                           | Capital in excess of par value                                                                                                                                             |                                            |        | 22,891       |        |  |        | 22,758 |       
|                                           | Other                                                                                                                                                                      |                                            |        | (1,021       | )      |  |        | (973   | )     
|                                           | Unearned compensation                                                                                                                                                      |                                            |        | (42          | )      |  |        |       |       
|                                           | Treasury stock at cost; 2,808 shares at
    September 30, 2002 and 1,792 shares at December 31,
    2001                                                                   |                                            |        | (12,202      | )      |  |        | (7,116 | )     
|                                           | Accumulated other comprehensive (loss) income                                                                                                                              |                                            |        | (78          | )      |  |        | 27     |       
|                                           | Retained earnings                                                                                                                                                          |                                            |        | 33,153       |        |  |        | 28,058 |       
|                                           |                                                                                                                                                                            |                                            |        |              |        |  |        |       
|                                           |                                                                                                                                                                            | Total stockholders equity                 |        |              | 42,713 |  |        |        | 42,766 | 
|                                           |                                                                                                                                                                            |                                            |        |              |        |  |        |       
|                                           |                                                                                                                                                                            | Total liabilities and stockholders equity |        | $            | 73,172 |  |        | $      | 74,463 | 
|                                           |                                                                                                                                                                            |                                            |        |              |        |  |        |       

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

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TROVER SOLUTIONS, INC.






CONDENSED STATEMENTS OF INCOME


For the Three and Nine Months Ended
September 30, 2002 and 2001


(Unaudited)


(In thousands, except per share
information)


|                                       |                            |                    |        |                   |  |      |        |       |  |   |        |        |  |   |        |        | 
|-------------------------------------- | -------------------------- | ------------------ | ------ | ----------------- |  | ---- | ------ | ----- |  | - | ------ | ------ |  | - | ------ | ------ | 
|                                       |                            |                    |        |                  
|                                       |                            | Three Months Ended |        | Nine Months Ended
|                                       |                            | September 30,      |        | September 30,    
|                                       |                            |                    |        |                  
|                                       |                            | 2002               |        | 2001              |  | 2002 |        | 2001 
|                                       |                            |                    |        |                   |  |      |        |      
|Claims revenues                        |                            | $                  | 17,820 |                   |  | $    | 15,093 |       |  | $ | 52,583 |        |  | $ | 47,105 |       
|Cost of revenues                       |                            |                    | 8,677  |                   |  |      | 7,646  |       |  |   | 25,527 |        |  |   | 23,089 |       
|                                       |                            |                    |        |                   |  |      |        |       |  |   |        |        |  |   |        |       
|                                       | Gross profit               |                    |        | 9,143             |  |      |        | 7,447 |  |   |        | 27,056 |  |   |        | 24,016 | 
|                                       |                            |                    |        |                   |  |      |        |       |  |   |        |        |  |   |        |       
|Support expenses                       |                            |                    | 5,021  |                   |  |      | 3,984  |       |  |   | 14,914 |        |  |   | 12,939 |       
|Depreciation and amortization          |                            |                    | 1,188  |                   |  |      | 1,694  |       |  |   | 3,706  |        |  |   | 4,906  |       
|Research and development               |                            |                    |       |                   |  |      | 124    |       |  |   |       |        |  |   | 415    |       
|                                       |                            |                    |        |                   |  |      |        |       |  |   |        |        |  |   |        |       
|                                       | Operating income           |                    |        | 2,934             |  |      |        | 1,645 |  |   |        | 8,436  |  |   |        | 5,756  | 
|                                       |                            |                    |        |                   |  |      |        |       |  |   |        |        |  |   |        |       
|Interest income                        |                            |                    | 67     |                   |  |      | 114    |       |  |   | 193    |        |  |   | 730    |       
|Interest expense                       |                            |                    | 115    |                   |  |      | 192    |       |  |   | 379    |        |  |   | 742    |       
|Other  loss on property held for sale |                            |                    |       |                   |  |      | 980    |       |  |   |       |        |  |   | 980    |       
|                                       |                            |                    |        |                   |  |      |        |       |  |   |        |        |  |   |        |       
|                                       | Income before income taxes |                    |        | 2,886             |  |      |        | 587   |  |   |        | 8,250  |  |   |        | 4,764  | 
|Provision for income taxes             |                            |                    | 1,097  |                   |  |      | (437   | )     |  |   | 3,155  |        |  |   | 1,296  |       
|                                       |                            |                    |        |                   |  |      |        |       |  |   |        |        |  |   |        |       
|                                       | Net income                 |                    | $      | 1,789             |  |      | $      | 1,024 |  |   | $      | 5,095  |  |   | $      | 3,468  | 
|                                       |                            |                    |        |                   |  |      |        |       |  |   |        |        |  |   |        |       
|Earnings per common share (basic)      |                            | $                  | 0.20   |                   |  | $    | 0.10   |       |  | $ | 0.54   |        |  | $ | 0.35   |       
|                                       |                            |                    |        |                   |  |      |        |       |  |   |        |        |  |   |        |       
|Earnings per common share (diluted)    |                            | $                  | 0.19   |                   |  | $    | 0.10   |       |  | $ | 0.53   |        |  | $ | 0.35   |       
|                                       |                            |                    |        |                   |  |      |        |       |  |   |        |        |  |   |        |       

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

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TROVER SOLUTIONS, INC.






CONDENSED STATEMENTS OF CASH FLOWS


For the Nine Months Ended September 30,
2002 and 2001


(Unaudited)


(In thousands)


|                                               |                                                                                       |                                              |                        |                                           |       |      |        |        |       |        |        |  
|---------------------------------------------- | ------------------------------------------------------------------------------------- | -------------------------------------------- | ---------------------- | ----------------------------------------- | ----- | ---- | ------ | ------ | ----- | ------ | ------ | -
|                                               |                                                                                       |                                             
|                                               |                                                                                       | Nine Months Ended                           
|                                               |                                                                                       | September 30,                               
|                                               |                                                                                       |                                             
|                                               |                                                                                       | 2002                                         |                        | 2001                                     
|                                               |                                                                                       |                                              |                        |                                          
|Cash flows from operating activities:          |                                                                                       |                                              |                        |                                           |       |      |        |       
|                                               | Net income                                                                            |                                              | $                      | 5,095                                     |       |      | $      | 3,468  |      
|                                               | Adjustments to reconcile net income to net cash
    provided by operating activities: |                                              |                        |                                           |       |      |        |        |      
|                                               |                                                                                       | Depreciation and amortization                |                        |                                           | 4,018 |      |        |        | 4,906 |       
|                                               |                                                                                       | Other                                        |                        |                                           | (93   | )    |        |        | 6     |       
|                                               |                                                                                       | Loss on property held for sale               |                        |                                           |      |      |        |        | 980   |       
|                                               |                                                                                       | Changes in operating assets and liabilities: |                        |                                           |       |      |        |        |       |       
|                                               |                                                                                       |                                              | Restricted cash        |                                           |       | 472  |        |        |       | 1,594  |       
|                                               |                                                                                       |                                              | Accounts receivable    |                                           |       | (379 | )      |        |       | (1,995 | )     
|                                               |                                                                                       |                                              | Other current assets   |                                           |       | (405 | )      |        |       | (136   | )     
|                                               |                                                                                       |                                              | Other assets           |                                           |       | (188 | )      |        |       | (552   | )     
|                                               |                                                                                       |                                              | Trade accounts payable |                                           |       | 988  |        |        |       | 225    |       
|                                               |                                                                                       |                                              | Accrued expenses       |                                           |       | (131 | )      |        |       | (4,170 | )     
|                                               |                                                                                       |                                              | Funds due clients      |                                           |       | (334 | )      |        |       | (1,694 | )     
|                                               |                                                                                       |                                              | Income taxes payable   |                                           |       | 607  |        |        |       | (396   | )     
|                                               |                                                                                       |                                              | Other liabilities      |                                           |       | 134  |        |        |       | 6      |       
|                                               |                                                                                       |                                              |                        |                                           |       |      |        |       
|                                               |                                                                                       |                                              |                        | Net cash provided by operating activities |       |      | 9,784  |        |       |        | 2,242  |  
|                                               |                                                                                       |                                              |                        |                                           |       |      |        |       
|Cash flows from investing activities:          |                                                                                       |                                              |                        |                                           |       |      |        |       
|                                               | Acquisitions, net of cash acquired                                                    |                                              |                        |                                          |       |      |        | 2,551  |      
|                                               | Purchases of property and equipment                                                   |                                              |                        | (1,821                                    | )     |      |        | (1,408 | )    
|                                               | Capitalization of internally developed software                                       |                                              |                        | (1,497                                    | )     |      |        | (1,410 | )    
|                                               |                                                                                       |                                              |                        |                                           |       |      |        |       
|                                               |                                                                                       |                                              |                        | Net cash used in investing activities     |       |      | (3,318 | )      |       |        | (267   | )
|                                               |                                                                                       |                                              |                        |                                           |       |      |        |       
|Cash flows from financing activities:          |                                                                                       |                                              |                        |                                           |       |      |        |       
|                                               | Line of credit repayments                                                             |                                              |                        | (3,300                                    | )     |      |        | (3,500 | )    
|                                               | Line of credit proceeds                                                               |                                              |                        | 800                                       |       |      |        | 1,500  |      
|                                               | Repurchase of common stock                                                            |                                              |                        | (5,126                                    | )     |      |        | (79    | )    
|                                               | Issuance of common stock                                                              |                                              |                        | 117                                       |       |      |        | 105    |      
|                                               | Other                                                                                 |                                              |                        | (48                                       | )     |      |        | (45    | )    
|                                               |                                                                                       |                                              |                        |                                           |       |      |        |       
|                                               |                                                                                       |                                              |                        | Net cash used in financing activities     |       |      | (7,557 | )      |       |        | (2,019 | )
|                                               |                                                                                       |                                              |                        |                                           |       |      |        |       
|Net decrease in cash and cash equivalents      |                                                                                       |                                              | (1,091                 | )                                         |       |      | (44    | )     
|Cash and cash equivalents, beginning of period |                                                                                       |                                              | 2,547                  |                                           |       |      | 1,297  |       
|                                               |                                                                                       |                                              |                        |                                           |       |      |        |       
|Cash and cash equivalents, end of period       |                                                                                       | $                                            | 1,456                  |                                           |       | $    | 1,253  |       
|                                               |                                                                                       |                                              |                        |                                           |       |      |        |       

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

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TROVER SOLUTIONS, INC.






NOTES TO CONDENSED FINANCIAL
STATEMENTS

(Unaudited)


1.     Organization
and Basis of Presentation

Trover Solutions, Inc. (hereinafter referred to
as the Company), a Delaware corporation, was
incorporated on June 30, 1988. The Company provides
subrogation and certain other claims recovery and cost
containment services, on an outsourcing basis, 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, i.e.,
the Company identifies, investigates and recovers
accident-related medical benefits incurred by its healthcare
payor and insurance 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) recovering 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 except for
those items discussed in Notes 9 and 12. 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.
During the three months ended June 30, 2002, the Company
completed the transitional impairment test under FAS 142
for all goodwill recorded as of January 1, 2002. See
Note 12 Cost in Excess of Net Assets Acquired and
Other Intangible Assets.

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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 believes that the adoption of FAS 143
will not have a significant impact 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 adoption of FAS 144 had no significant
impact on the Companys financial position or results of
operations.

In July 2002, the FASB issued Statement of
Financial Accounting Standards No. 146 (FAS 146),
Accounting for Exit or Disposal Activities.
FAS 146 addresses the recognition, measurement, and
reporting of costs that are associated with exit and disposal
activities, including costs related to terminating a contract
that is not a capital lease and termination benefits that
employees who are involuntarily terminated receive under the
terms of a one-time benefit arrangement that is not an ongoing
benefit arrangement or an individual deferred-compensation
contract. FAS 146 supersedes Emerging Issues Task Force Issue
No. 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring) and
requires liabilities associated with exit and disposal
activities to be expensed as incurred. FAS 146 will be
effective for exit or disposal activities of the Company that
are initiated after December 31, 2002. The Company believes
that the adoption of FAS 146 will not have a significant impact
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 September 30, 2002,
the interest rate was 3.56% 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 September 30,
2002, $5.5 million was outstanding under the Revolving
Credit Facility.

5



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##### Table of Contents



NOTES TO CONDENSED FINANCIAL
STATEMENTS  (Continued)


5.     Stock
Repurchase Plan

The Companys Board of Directors authorized
the repurchase of up to $20 million of the Companys
Common Stock in the open market, including $10 million
authorized on May 10, 2002, 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 $20 million of the
Companys Common Stock or until it otherwise determines to
terminate the stock repurchase plan. The Company repurchased
362,800 and 1,025,243 shares of its own stock during the
three and nine months ended September 30, 2002,
respectively, at an average price of $4.28 and $5.00 per share,
respectively. From inception of the program through
September 30, 2002, the total number of shares repurchased
was 2,817,508 at a cost of $12.2 million, or an average
cost of $4.35 per share. Except for 10,000 shares
previously repurchased but re-issued in connection with an
employee restricted stock award, all of the reacquired shares of
Common Stock through September 30, 2002 are reflected as
treasury stock on the accompanying Condensed Balance Sheets
(Unaudited).

6.     Related Party
Transactions

The Company has a contract for legal services
with a professional service corporation, Sharps &
Associates, PSC, that is wholly owned by one of the
Companys officers, Douglas R. Sharps. 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. All
payments to Sharps & Associates are reviewed and
approved by the Audit Committee of the Companys Board of
Directors. For the three and nine months ended
September 30, 2002, approximately $861,000 and
$2.5 million, respectively, was paid to this law firm for
such legal services, including all employees and expenses.

In May 1997, Patrick B. McGinnis, the Chairman
and Chief Executive Officer of the Company, borrowed from a
commercial bank $500,000 to finance the payment of income taxes
related to the ordinary income deemed to have been received by
him in the form of 80,000 shares of Common Stock granted to
him in connection with the Companys initial public
offering and $350,000 to finance the purchase of 25,000
additional shares of Common Stock in the initial public offering.

At Mr. McGinnis request, following
conversations with his lender, on February 12, 1999, the
Board of Directors approved a loan in the amount of $350,000 to
Mr. McGinnis, 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
(the applicable Federal mid-term rate in effect for tax purposes
at the date of the note), 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. The
promissory note and all accrued interest are due and payable
upon the earlier of January 1, 2005 or the termination of
Mr. McGinniss employment with the Company. At
September 30, 2002, the promissory note of $886,520 and
accrued interest of $134,358 was outstanding.

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

6



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##### Table of Contents



NOTES TO CONDENSED FINANCIAL
STATEMENTS  (Continued)


compensation under the Agreement should
Mr. McGinnis default under the Amended Promissory Note. At
the election of Mr. McGinnis, the payment of the deferred
compensation, upon payment of the Amended Promissory Note, may
be extended for a period of not more than ten years. At
September 30, 2002, the amount of deferred compensation was
$72,354, with accrued interest of $6,362.

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 |       | Nine Months Ended
|                                                                   |         | September 30,      |       | September 30,    
|                                                                   |         |                    |       |                  
|                                                                   |         | 2002               |       | 2001              |  | 2002 |        | 2001
|                                                                   |         |                    |       |                   |  |      |        |     
|Weighted average number of common shares
    outstanding           |         |                    | 9,131 |                   |  |      | 9,807  |      |  |   | 9,398 |      |  |   | 9,795 |     
|Add: Dilutive stock options                                        |         |                    | 225   |                   |  |      | 233    |      |  |   | 269   |      |  |   | 165   |     
|                                                                   |         |                    |       |                   |  |      |        |      |  |   |       |      |  |   |       |     
|Number of common shares outstanding (diluted)                      |         |                    | 9,356 |                   |  |      | 10,040 |      |  |   | 9,667 |      |  |   | 9,960 |     
|                                                                   |         |                    |       |                   |  |      |        |      |  |   |       |      |  |   |       |     
|Net earnings for earnings per common share (basic
    and diluted) |         | $                  | 1,789 |                   |  | $    | 1,024  |      |  | $ | 5,095 |      |  | $ | 3,468 |     
|                                                                   |         |                    |       |                   |  |      |        |      |  |   |       |      |  |   |       |     
|Earnings per common share:                                         |         |                    |       |                   |  |      |        |      |  |   |       |      |  |   |       |     
|                                                                   | Basic   |                    | $     | 0.20              |  |      | $      | 0.10 |  |   | $     | 0.54 |  |   | $     | 0.35 | 
|                                                                   |         |                    |       |                   |  |      |        |      |  |   |       |      |  |   |       |     
|                                                                   | Diluted |                    | $     | 0.19              |  |      | $      | 0.10 |  |   | $     | 0.53 |  |   | $     | 0.35 | 
|                                                                   |         |                    |       |                   |  |      |        |      |  |   |       |      |  |   |       |     

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
1,011,301 and 952,301 shares for the three and nine months
ended September 30, 2002, respectively, and 935,217 and
1,304,253 shares for the comparable periods in 2001,
respectively, 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 and nine months ended September 30, 2002 and 2001
consists of the following (in thousands):

|                                      |  |                    |       |                   |  |      |       |      |  |   |       |   |  |   |       | 
|------------------------------------- |  | ------------------ | ----- | ----------------- |  | ---- | ----- | ---- |  | - | ----- | - |  | - | ----- | 
|                                      |  |                    |       |                  
|                                      |  | Three Months Ended |       | Nine Months Ended
|                                      |  | September 30,      |       | September 30,    
|                                      |  |                    |       |                  
|                                      |  | 2002               |       | 2001              |  | 2002 |       | 2001
|                                      |  |                    |       |                   |  |      |       |     
|Net income                            |  | $                  | 1,789 |                   |  | $    | 1,024 |      |  | $ | 5,095 |   |  | $ | 3,468 | 
|Other comprehensive income (loss):    |  |                    |       |                   |  |      |       |      |  |   |       |   |  |   |       | 
|Deferred loss on cash flow hedge, net |  |                    | (62   | )                 |  |      |      |      |  |   | (105  | ) |  |   |      | 
|                                      |  |                    |       |                   |  |      |       |      |  |   |       |   |  |   |       | 
|Comprehensive income, net of tax      |  | $                  | 1,727 |                   |  | $    | 1,024 |      |  | $ | 4,990 |   |  | $ | 3,468 | 
|                                      |  |                    |       |                   |  |      |       |      |  |   |       |   |  |   |       | 

7



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##### Table of Contents



NOTES TO CONDENSED FINANCIAL
STATEMENTS  (Continued)


Accumulated other comprehensive
(loss) income consists of the following:

|                            |  |           |     |  
|--------------------------- |  | --------- | --- | -
|                            |  | Cash Flow
|                            |  | Hedge    
|                            |  |          
|Balance, December 31, 2001  |  | $         | 27  |  
|First quarter 2002 change   |  |           | 13  |  
|                            |  |           |     |  
|Balance, March 31, 2002     |  |           | 40  |  
|Second quarter 2002 change  |  |           | (56 | )
|                            |  |           |     |  
|Balance, June 30, 2002      |  |           | (16 | )
|Third quarter 2002 charge   |  |           | (62 | )
|                            |  |           |     |  
|Balance, September 30, 2002 |  | $         | (78 | )
|                            |  |           |     |  

9.     Income
Taxes

The Company accrued its income tax at an
effective rate of 38.0% and 38.2% for the three and nine months
ended September 30, 2002, respectively. These rates are
lower than the Companys historical effective income tax
rate due to research and experimental tax credits, which
includes a one-time recapture for the previous four tax years,
and state tax planning initiatives implemented during 2002.

In September 2001, the Company concluded that, in
light of the passage of time with respect to the filing of the
Companys tax returns for years up to and including 1997,
it was proper to reverse previously accrued taxes reducing the
tax provision for the three months ended September 30, 2001
by $681,000, net, or approximately $0.07 per share. This accrual
related primarily to certain non-cash compensation charges taken
in connection with the initial public offering of the
Companys stock in 1997. Management believes that adequate
amounts of tax and related interest and penalties, if any, have
been provided for any adjustments that may result.

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 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 September 30, 2002, the fair value
of the hedge was a liability of $133,934 ($78,351, 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

8



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##### Table of Contents



NOTES TO CONDENSED FINANCIAL
STATEMENTS  (Continued)


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.

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 and nine months
ended September 30, 2002 and 2001 are as follows (in
thousands):

|                                   |                                                                 |                                     |   |                   |        |      |   |        |        |  |   |         |        |  |   |        |        | 
|---------------------------------- | --------------------------------------------------------------- | ----------------------------------- | - | ----------------- | ------ | ---- | - | ------ | ------ |  | - | ------- | ------ |  | - | ------ | ------ | 
|                                   |                                                                 |                                     |   |                  
|                                   |                                                                 | Three Months Ended                  |   | Nine Months Ended
|                                   |                                                                 | September 30,                       |   | September 30,    
|                                   |                                                                 |                                     |   |                  
|                                   |                                                                 | 2002                                |   | 2001              |        | 2002 |   | 2001  
|                                   |                                                                 |                                     |   |                   |        |      |   |       
|Revenues:                          |                                                                 |                                     |   |                   |        |      |   |        |        |  |   |         |        |  |   |       
|                                   | Healthcare Recovery Services                                    |                                     | $ | 17,602            |        |      | $ | 15,051 |        |  | $ | 52,182  |        |  | $ | 46,994 |       
|                                   | Property and Casualty Recovery Services                         |                                     |   | 217               |        |      |   | 42     |        |  |   | 400     |        |  |   | 111    |       
|                                   | Software                                                        |                                     |   | 232               |        |      |   |       |        |  |   | 512     |        |  |   |       |       
|                                   | Elimination of intercompany revenue                             |                                     |   | (231              | )      |      |   |       |        |  |   | (511    | )      |  |   |       |       
|                                   |                                                                 |                                     |   |                   |        |      |   |        |        |  |   |         |        |  |   |       
|                                   |                                                                 | Total revenues                      |   | $                 | 17,820 |      |   | $      | 15,093 |  |   | $       | 52,583 |  |   | $      | 47,105 | 
|                                   |                                                                 |                                     |   |                   |        |      |   |        |        |  |   |         |        |  |   |       
|Operating income (loss):           |                                                                 |                                     |   |                   |        |      |   |        |        |  |   |         |        |  |   |       
|                                   | Healthcare Recovery Services                                    |                                     | $ | 7,158             |        |      | $ | 4,760  |        |  | $ | 21,475  |        |  | $ | 16,216 |       
|                                   | Property and Casualty Recovery Services                         |                                     |   | (188              | )      |      |   | (288   | )      |  |   | (765    | )      |  |   | (804   | )     
|                                   | Software                                                        |                                     |   | (133              | )      |      |   | (310   | )      |  |   | (502    | )      |  |   | (936   | )     
|                                   | Unallocated Corporate support expenses                          |                                     |   | (3,903            | )      |      |   | (2,517 | )      |  |   | (11,772 | )      |  |   | (8,720 | )     
|                                   |                                                                 |                                     |   |                   |        |      |   |        |        |  |   |         |        |  |   |       
|                                   |                                                                 | Total operating income              |   | $                 | 2,934  |      |   | $      | 1,645  |  |   | $       | 8,436  |  |   | $      | 5,756  | 
|                                   |                                                                 |                                     |   |                   |        |      |   |        |        |  |   |         |        |  |   |       
|Depreciation and amortization:     |                                                                 |                                     |   |                   |        |      |   |        |        |  |   |         |        |  |   |       
|                                   | Healthcare Recovery Services                                    |                                     | $ | 1,010             |        |      | $ | 1,508  |        |  | $ | 3,186   |        |  | $ | 4,409  |       
|                                   | Property and Casualty Recovery Services                         |                                     |   | 34                |        |      |   | 19     |        |  |   | 87      |        |  |   | 48     |       
|                                   | Software                                                        |                                     |   | 6                 |        |      |   | 65     |        |  |   | 30      |        |  |   | 132    |       
|                                   | Unallocated Corporate depreciation and
    amortization expense |                                     |   | 138               |        |      |   | 102    |        |  |   | 403     |        |  |   | 317    |       
|                                   |                                                                 |                                     |   |                   |        |      |   |        |        |  |   |         |        |  |   |       
|                                   |                                                                 | Total depreciation and amortization |   | $                 | 1,188  |      |   | $      | 1,694  |  |   | $       | 3,706  |  |   | $      | 4,906  | 
|                                   |                                                                 |                                     |   |                   |        |      |   |        |        |  |   |         |        |  |   |       
|Income (loss) before income taxes: |                                                                 |                                     |   |                   |        |      |   |        |        |  |   |         |        |  |   |       
|                                   | Healthcare Recovery Services                                    |                                     | $ | 7,187             |        |      | $ | 4,777  |        |  | $ | 21,524  |        |  | $ | 16,489 |       
|                                   | Property and Casualty Recovery Services                         |                                     |   | (199              | )      |      |   | (291   | )      |  |   | (795    | )      |  |   | (815   | )     
|                                   | Software                                                        |                                     |   | (169              | )      |      |   | (318   | )      |  |   | (602    | )      |  |   | (959   | )     
|                                   | Unallocated Corporate (loss)                                    |                                     |   | (3,933            | )      |      |   | (3,581 | )      |  |   | (11,877 | )      |  |   | (9,951 | )     
|                                   |                                                                 |                                     |   |                   |        |      |   |        |        |  |   |         |        |  |   |       
|                                   |                                                                 | Total income before income taxes    |   | $                 | 2,886  |      |   | $      | 587    |  |   | $       | 8,250  |  |   | $      | 4,764  | 
|                                   |                                                                 |                                     |   |                   |        |      |   |        |        |  |   |         |        |  |   |       

9



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##### Table of Contents



NOTES TO CONDENSED FINANCIAL
STATEMENTS  (Continued)


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 is assessed for
impairment at least annually in 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. The second step measures the amount of impairment
and is required only if impairment is indicated by the first
step.

The Company engaged the services of a third party
valuation firm to complete an analysis of the fair value of the
reporting units during the first half of 2002. The completion of
step one during the three months ended June 30, 2002, did
not result in an impairment charge for the Company. The Company
will perform its annual impairment review during the second
quarter of each year, commencing in the second quarter of 2003.
The Companys reporting units are generally consistent with
the operating segments underlying the segments identified in
Note 11 Segment Information. All recorded Cost
in Excess of Net Assets Acquired and Other Intangible Assets
relate to the Healthcare Recovery Services segment.

Following is a reconciliation of previously
reported financial information to adjusted amounts excluding
amortization of Cost in Excess of Net Assets Acquired for the
three and nine months ended September 30, 2001 (in
thousands, except per share amounts):

|                                                                       |                                   |                    |       |                   |  |      |       |       |  |   |       |       |  |   |       |       | 
|---------------------------------------------------------------------- | --------------------------------- | ------------------ | ----- | ----------------- |  | ---- | ----- | ----- |  | - | ----- | ----- |  | - | ----- | ----- | 
|                                                                       |                                   |                    |       |                  
|                                                                       |                                   | Three Months Ended |       | Nine Months Ended
|                                                                       |                                   | September 30,      |       | September 30,    
|                                                                       |                                   |                    |       |                  
|                                                                       |                                   | 2002               |       | 2001              |  | 2002 |       | 2001 
|                                                                       |                                   |                    |       |                   |  |      |       |      
|Net income:                                                            |                                   |                    |       |                   |  |      |       |       |  |   |       |       |  |   |       |      
|Net income as reported                                                 |                                   | $                  | 1,789 |                   |  | $    | 1,024 |       |  | $ | 5,095 |       |  | $ | 3,468 |      
|Amortization of costs in excess of net assets
    acquired, net of tax |                                   |                    |      |                   |  |      | 250   |       |  |   |      |       |  |   | 726   |      
|                                                                       |                                   |                    |       |                   |  |      |       |       |  |   |       |       |  |   |       |      
|                                                                       | Adjusted net income               |                    | $     | 1,789             |  |      | $     | 1,274 |  |   | $     | 5,095 |  |   | $     | 4,194 | 
|                                                                       |                                   |                    |       |                   |  |      |       |       |  |   |       |       |  |   |       |      
|Basic earnings per share:                                              |                                   |                    |       |                   |  |      |       |       |  |   |       |       |  |   |       |      
|Earnings per share as reported                                         |                                   | $                  | 0.20  |                   |  | $    | 0.10  |       |  | $ | 0.54  |       |  | $ | 0.35  |      
|Amortization of costs in excess of net assets
    acquired, net of tax |                                   |                    |      |                   |  |      | 0.03  |       |  |   |      |       |  |   | 0.08  |      
|                                                                       |                                   |                    |       |                   |  |      |       |       |  |   |       |       |  |   |       |      
|                                                                       | Basic earnings per common share   |                    | $     | 0.20              |  |      | $     | 0.13  |  |   | $     | 0.54  |  |   | $     | 0.43  | 
|                                                                       |                                   |                    |       |                   |  |      |       |       |  |   |       |       |  |   |       |      
|Diluted earnings per share:                                            |                                   |                    |       |                   |  |      |       |       |  |   |       |       |  |   |       |      
|Earnings per share as reported                                         |                                   | $                  | 0.19  |                   |  | $    | 0.10  |       |  | $ | 0.53  |       |  | $ | 0.35  |      
|Amortization of costs in excess of net assets
    acquired, net of tax |                                   |                    |      |                   |  |      | 0.03  |       |  |   |      |       |  |   | 0.07  |      
|                                                                       |                                   |                    |       |                   |  |      |       |       |  |   |       |       |  |   |       |      
|                                                                       | Diluted earnings per common share |                    | $     | 0.19              |  |      | $     | 0.13  |  |   | $     | 0.53  |  |   | $     | 0.42  | 
|                                                                       |                                   |                    |       |                   |  |      |       |       |  |   |       |       |  |   |       |      

The carrying value of Cost in Excess of Net
Assets Acquired, net, was approximately $29.1 million at
September 30, 2002.

10



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##### Table of Contents



NOTES TO CONDENSED FINANCIAL
STATEMENTS  (Continued)


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 September 30, 2002 and December 31, 2001 are
as follows (in thousands):

|                       |       |                    |       |                   |  |     |       |       |  |              |       |       |  |   |       |       |  |   |     |       |  |   |       |       | 
|---------------------- | ----- | ------------------ | ----- | ----------------- |  | --- | ----- | ----- |  | ------------ | ----- | ----- |  | - | ----- | ----- |  | - | --- | ----- |  | - | ----- | ----- | 
|                       |       |                    |       |                  
|                       |       | September 30, 2002 |       | December 31, 2001
|                       |       |                    |       |                  
|                       |       |                    |       | Accumulated       |  |     |       |       |  | Accumulated  |       |      
|                       |       | Cost               |       | Amortization      |  | Net |       | Cost  |  | Amortization |       | Net  
|                       |       |                    |       |                   |  |     |       |       |  |              |       |      
|Client lists           |       | $                  | 4,900 |                   |  | $   | 1,191 |       |  | $            | 3,709 |       |  | $ | 4,900 |       |  | $ | 945 |       |  | $ | 3,955 |      
|Backlog                |       |                    | 570   |                   |  |     | 418   |       |  |              | 152   |       |  |   | 570   |       |  |   | 333 |       |  |   | 237   |      
|Non-compete agreements |       |                    | 530   |                   |  |     | 440   |       |  |              | 90    |       |  |   | 530   |       |  |   | 350 |       |  |   | 180   |      
|                       |       |                    |       |                   |  |     |       |       |  |              |       |       |  |   |       |       |  |   |     |       |  |   |       |      
|                       | Total |                    | $     | 6,000             |  |     | $     | 2,049 |  |              | $     | 3,951 |  |   | $     | 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 three and nine month periods ended September 30,
2002 was approximately $140,000 and $421,000, respectively. Over
the three month period ending 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):

|                                            |  |   |     | 
|------------------------------------------- |  | - | --- | 
|Three month period ending December 31, 2002 |  | $ | 140 | 
|Year ending December 31,:                   |  |   |     | 
|2003                                        |  |   | 496 | 
|2004                                        |  |   | 340 | 
|2005                                        |  |   | 327 | 
|2006                                        |  |   | 327 | 

13.     Concentration
of Clients

The Companys largest client is UnitedHealth
Group (UHG). For each of the nine month periods ended
September 30, 2002 and 2001, UHG generated 27% of the
Companys revenues. During the second quarter of 2002, UHG
informed the Company of its intention to terminate subrogation
services with respect to all but approximately 1 million
lives of the 9.7 million then remaining lives. See
Item 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations 
Concentration of Clients.

14.     Supplemental
Balance Sheet Information

|                                 |                                           |                             |        |              |       |  |        |         |       | 
|-------------------------------- | ----------------------------------------- | --------------------------- | ------ | ------------ | ----- |  | ------ | ------- | ----- | 
|                                 |                                           | September 30,               |        | December 31,
|                                 |                                           | 2002                        |        | 2001        
|                                 |                                           |                             |        |             
|Property and equipment, at cost: |                                           |                             |        |              |       |  |        |        
|                                 | Furniture and fixtures                    |                             | $      | 3,260        |       |  | $      | 3,112   |      
|                                 | Office equipment                          |                             |        | 2,067        |       |  |        | 2,041   |      
|                                 | Computer equipment                        |                             |        | 11,465       |       |  |        | 10,256  |      
|                                 | Software                                  |                             |        | 9,123        |       |  |        | 7,119   |      
|                                 | Leasehold improvements                    |                             |        | 1,429        |       |  |        | 1,500   |      
|                                 |                                           |                             |        |              |       |  |        |        
|                                 |                                           |                             | 27,344 |              |       |  | 24,028 |        
|                                 | Accumulated depreciation and amortization |                             |        | (20,586      | )     |  |        | (17,409 | )    
|                                 |                                           |                             |        |              |       |  |        |        
|                                 |                                           | Property and equipment, net |        | $            | 6,758 |  |        | $       | 6,619 | 
|                                 |                                           |                             |        |              |       |  |        |        

11



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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 Humana Inc., Kaiser Permanente,
Wellpoint Health Network and The Principal Financial Group. The
Company had 41.8 million and 50.7 million lives under
contract from its clientele at September 30, 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.

The operating cycle for the Healthcare Recovery
Services segments products is a function of the rate at
which recoveries are made from backlog. The operating cycle for
subrogation is 5 to 6 years, for provider bill audit 12 to
18 months, and for overpayments less than 12 months.
The Company reports the backlog of terminated clients in its
backlog key indicator until the Company ceases recovery
activities for that terminated backlog. See Results of
Operations.

12



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##### Table of Contents



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

The Companys expenses are determined
primarily by the number of employees directly engaged in
recovery activities (cost of revenues) 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.

The Company reaffirms its previous guidance
issued on July 31, 2002 that it expects that the Healthcare
Recovery Services segment will report for the year ended
December 31, 2002 pretax income in the range of
$28.0 million to $28.3 million on revenues in the
range of $68.0 million to $68.8 million.

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

Lives Sold and Installed*

|                                                          |  |                    |      |                   |  |      |      |      |  |  |      |   |  |  |      |  
|--------------------------------------------------------- |  | ------------------ | ---- | ----------------- |  | ---- | ---- | ---- |  |  | ---- | - |  |  | ---- | -
|                                                          |  |                    |      |                  
|                                                          |  | Three Months Ended |      | Nine Months Ended
|                                                          |  | September 30,      |      | September 30,    
|                                                          |  |                    |      |                  
|                                                          |  | 2002               |      | 2001              |  | 2002 |      | 2001
|                                                          |  |                    |      |                   |  |      |      |     
|Cumulative lives sold, beginning of period                |  |                    | 42.4 |                   |  |      | 51.1 |      |  |  | 49.1 |   |  |  | 52.5 |  
|Lives from existing client loss, net(1)                   |  |                    | (0.7 | )                 |  |      | (2.6 | )    |  |  | (8.9 | ) |  |  | (8.1 | )
|Lives added from new contracts with existing
    clients  |  |                    | 0.0  |                   |  |      | 0.3  |      |  |  | 0.8  |   |  |  | 1.3  |  
|Lives added from contracts with new clients               |  |                    | 0.1  |                   |  |      | 1.9  |      |  |  | 0.8  |   |  |  | 5.0  |  
|                                                          |  |                    |      |                   |  |      |      |      |  |  |      |   |  |  |      |  
|Cumulative lives sold, end of period                      |  |                    | 41.8 |                   |  |      | 50.7 |      |  |  | 41.8 |   |  |  | 50.7 |  
|                                                          |  |                    |      |                   |  |      |      |      |  |  |      |   |  |  |      |  
|Lives sold eliminations/cross-sold lives(2)               |  |                    | 6.8  |                   |  |      | 5.0  |      |  |  | 6.8  |   |  |  | 5.0  |  
|                                                          |  |                    |      |                   |  |      |      |      |  |  |      |   |  |  |      |  
|Lives installed, end of period                            |  |                    | 40.8 |                   |  |      | 46.8 |      |  |  | 40.8 |   |  |  | 46.8 |  
|                                                          |  |                    |      |                   |  |      |      |      |  |  |      |   |  |  |      |  
|Lives installed eliminations/cross-installed
    lives(3) |  |                    | 4.8  |                   |  |      | 3.7  |      |  |  | 4.8  |   |  |  | 3.7  |  
|                                                          |  |                    |      |                   |  |      |      |      |  |  |      |   |  |  |      |  



---



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | * | All references to lives in the table,
    whether reported as from existing client loss, added from new
    contracts with existing clients or with new clients, lives sold,
    lives sold eliminations/cross-sold lives, as lives installed, or
    as lives installed eliminations/cross-installed lives are
    derived by the Company from information provided to it by
    clients and may contain estimates.



|    |                                                                                                                                                                                                                                                                                                                                         
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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) | Lives sold eliminations/cross-sold
    lives specifies the number of lives subject to client
    contracts under which the Company provides or will provide more
    than one healthcare recovery service to a client population. By
    contrast, the number of lives reported in Cumulative lives
    sold, end of period does not

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|    |                                                                                                                                                                                                                                                                                                                                                                                                                                
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    | take into account instances in which multiple
    healthcare recovery services are provided to the same client
    population.                                                                                                                                                                                                                                                                                                 
|   
|(3) | Lives installed
    eliminations/cross-installed lives specifies the number of
    lives as to which the Company provides more than one healthcare
    recovery service to a client population. By contrast, the number
    of lives reported in Lives installed, end of period
    does not take into account instances in which multiple
    healthcare recovery services are provided to the same client
    population.

Other Key Operating Indicators

|                   |  |                    |         |                   |  |      |         |      |  |   |         |     |  |   |         |    
|------------------ |  | ------------------ | ------- | ----------------- |  | ---- | ------- | ---- |  | - | ------- | --- |  | - | ------- | ---
|                   |  |                    |         |                  
|                   |  | Three Months Ended |         | Nine Months Ended
|                   |  | September 30,      |         | September 30,    
|                   |  |                    |         |                  
|                   |  | 2002               |         | 2001              |  | 2002 |         | 2001
|                   |  |                    |         |                   |  |      |         |     
|Backlog(1)         |  | $                  | 1,531.0 | (2)               |  | $    | 1,389.3 | (3)  |  | $ | 1,531.0 | (2) |  | $ | 1,389.3 | (3)
|Claims recoveries  |  | $                  | 62.5    |                   |  | $    | 56.7    |      |  | $ | 187.9   |     |  | $ | 176.3   |    
|Throughput(4)      |  |                    | 4.1     | %                 |  |      | 4.2     | %    |  |   | 12.8    | %   |  |   | 13.7    | %  
|Effective fee rate |  |                    | 28.2    | %                 |  |      | 26.6    | %    |  |   | 27.9    | %   |  |   | 26.7    | %  
|Claims revenues    |  | $                  | 17.6    |                   |  | $    | 15.1    |      |  | $ | 52.2    |     |  | $ | 47.0    |    



---



|    |                                                                                                                                                                                                                
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | 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.                                       
|   
|(2) | At September 30, 2002, approximately
    $411.4 million of the backlog derived from terminated
    clients and clients that, by that date, had given notice of
    termination. See Concentration of Clients.
|   
|(3) | At September 30, 2001, approximately
    $151.0 million of the backlog derived from terminated
    clients and clients that, by that date, had given notice of
    termination.                                
|   
|(4) | Throughput equals claims recoveries for the
    period divided by the average of backlog at the beginning and
    end of the period.                                                                           

Three and Nine Months Ended September 30,
2002 Compared to Three and Nine Months Ended September 30,
2001

Claims Revenues.Total Healthcare Recovery Services
revenues for the quarter ended September 30, 2002 increased
16.9%, to $17.6 million from $15.1 million for the
same quarter of 2001, and for the nine month period ended
September 30, 2002, increased 11.0%, to $52.2 million
from $47.0 million in the same period of 2001. Healthcare
claims recoveries for the quarter ended September 30, 2002
were $62.5 million, an increase of $5.8 million, or
10.2%, compared to $56.7 million for the same quarter of
2001. For the nine month period ended September 30, 2002,
healthcare claims recoveries increased 6.6%, from
$176.3 million to $187.9 million.

The Healthcare Recovery Services effective fee
rate for the quarter ended September 30, 2002 increased to
28.2% from 26.6% for the same quarter of 2001, and increased to
27.9% for the nine month period ended September 30, 2002 as
compared with 26.7% in the same period in 2001. The increase in
fee rate was primarily attributable to the increase in the fee
charged to UnitedHealth Group that was effective January 1,
2002. See Concentration of Clients.

Backlog for the Healthcare Recovery Services
segment increased to $1,531.0 million at September 30,
2002 from $1,389.3 million at September 30, 2001, an
increase of 10.2%. Approximately $138.0 million of the
increase 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 4.1% and 4.2% of average
backlog during the third quarter of 2002 and 2001, respectively.
The decrease in throughput from the quarter ended
September 30, 2001 is primarily the effect of a shift in
the backlog mix, with a greater percentage of backlog and
recoveries coming from provider bill audit, which typically
exhibits a lower

14



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##### Table of Contents



throughput rate than does healthcare subrogation.
Throughput for the nine month period ended September 30,
2002 also decreased from 13.7% for the comparable period in 2001
to 12.8%, for the same reason described above. Lives installed
decreased 6.0 million from 46.8 million at
September 30, 2001 to 40.8 million at
September 30, 2002 primarily because of the lives lost
relating to terminations by UnitedHealth Group. See
Concentration of Clients.


Cost of Revenues.Cost of revenues for the Healthcare
Recovery Services segment increased 9.3% for the quarter ended
September 30, 2002 to $8.2 million, from
$7.5 million for the same quarter in 2001, and was
$24.3 million for the nine months ended September 30,
2002, an increase of 6.6% from $22.8 million for the same
period in 2001. As a percentage of claims revenues, cost of
revenues decreased to 46.8% for the quarter ended
September 30, 2002 compared to 50.0% for the same quarter
in 2001. For the nine months ended September 30, 2002, cost
of revenues as a percentage of claims revenues decreased to
46.7% from 48.4% in 2001. Both decreases were a result of the
increase in revenue described above.

Support Expenses.Support expenses for the Healthcare
Recovery Services segment decreased 7.7% to $1.2 million
for the quarter ended September 30, 2002 from
$1.3 million for the same quarter in 2001 and were
$3.2 million for the nine months ended September 30,
2002 compared to $3.6 million for the comparable period in
2001. Support expenses decreased as a percentage of claims
revenues from 8.3% for the third quarter of 2001 to 6.8% for the
same quarter in 2002. For the nine months ended
September 30, 2002, support expenses as a percentage of
claims revenues were 6.1%, a decrease from 7.7% for the
comparable period in 2001. The decrease in support expenses as a
percentage of claims revenues resulted from the increase in
revenue described above and 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 because management of the Company views 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 26 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.

15



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##### Table of Contents



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

On July 31, 2002, the Company disclosed that
for the year ended December 31, 2002, it expected TransPaC
Solutions to incur pretax losses of between $0.8 million
and $1.0 million; recoveries would be from
$2.5 million to $3.2 million; and revenue would range
from $0.6 million to $0.8 million. The Company
reaffirms that guidance. 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 the
Companys Quarterly Report on Form 10-Q for the
quarter ended March 31, 2002, 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 |    | Nine Months Ended
|                                        |  | September 30,      |    | September 30,    
|                                        |  |                    |    |                  
|                                        |  | 2002               |    | 2001              |  | 2002 |    | 2001
|                                        |  |                    |    |                   |  |      |    |     
|Contracts in Force, beginning of period |  |                    | 27 |                   |  |      | 3  |      |  |  | 14 |   |  |  | 2  | 
|Outsourcing(1)                          |  |                    |   |                   |  |      | 2  |      |  |  | 1  |   |  |  | 2  | 
|Referrals/ Closed Claims(2)             |  |                    |   |                   |  |      | 6  |      |  |  | 12 |   |  |  | 7  | 
|Terminations                            |  |                    | (1 | )                 |  |      |   |      |  |  | (1 | ) |  |  |   | 
|                                        |  |                    |    |                   |  |      |    |      |  |  |    |   |  |  |    | 
|Contracts in Force, end of period       |  |                    | 26 |                   |  |      | 11 |      |  |  | 26 |   |  |  | 11 | 
|                                        |  |                    |    |                   |  |      |    |      |  |  |    |   |  |  |    | 



---



|    |                                                                                                                                                                                                          
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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 |      | Nine Months Ended
|                   |  | September 30,      |      | September 30,    
|                   |  |                    |      |                  
|                   |  | 2002               |      | 2001              |  | 2002 |      | 2001
|                   |  |                    |      |                   |  |      |      |     
|Backlog(1)         |  | $                  | 14.5 |                   |  | $    | 3.3  |      |  | $ | 14.5 |   |  | $ | 3.3  |  
|Claims recoveries  |  | $                  | 0.8  |                   |  | $    | 0.1  |      |  | $ | 1.6  |   |  | $ | 0.3  |  
|Throughput(2)      |  |                    | 7.1  | %                 |  |      | 2.8  | %    |  |   | 17.4 | % |  |   | 8.8  | %
|Effective fee rate |  |                    | 25.8 | %                 |  |      | 41.3 | %    |  |   | 25.6 | % |  |   | 34.1 | %
|Claims revenues    |  | $                  | 0.22 |                   |  | $    | 0.04 |      |  | $ | 0.40 |   |  | $ | 0.11 |  



---



|    |                                                                                                                                                             
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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.                        

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Three and Nine Months Ended September 30,
2002 Compared to Three and Nine Months Ended September 30,
2001

Claims Revenues.Total Property and Casualty Recovery
Services revenues for the quarter ended September 30, 2002
increased approximately $175,000, or 417%, from the same quarter
in 2001 and increased 260% to $400,000 for the nine month period
ended September 30, 2002 from $111,000 in the comparable
period of 2001. Property and Casualty Recovery Services claims
recoveries for the quarter ended September 30, 2002 were
$0.8 million, an increase of $0.7 million over the
same quarter in 2001. For the nine month period ended
September 30, 2002, claims recoveries increased 433% to
$1.6 million from $0.3 million during the comparable
period in 2001.

The Property and Casualty Recovery Services
effective fee rate for the quarter ended September 30, 2002
decreased to 25.8% from 41.3% for the same quarter of 2001 and
decreased to 25.6% for the nine months ended September 30,
2002 as compared to 34.1% in the same period in 2001. The
decrease in fee rate was primarily attributable to the change in
mix of referral and closed claim contracts, which typically bear
higher fees, and full outsourcing contracts, which typically
bear lower fees, that occurred in 2002.

Backlog.Backlog for
the Property and Casualty Recovery Services segment increased to
$14.5 million at September 30, 2002 from
$3.3 million at September 30, 2001 due to additional
contracts entered into by the Company during the nine months
ended September 30, 2002.

The Property and Casualty Recovery Services
segment had a throughput rate of approximately 7.1% and 2.8% of
average backlog during the third quarter of 2002 and 2001,
respectively. Throughput for the nine month period ended
September 30, 2002 also increased from 8.8% for the
comparable period of 2001 to 17.4%. The increases were due to
recoveries growing more quickly than the average backlog over
the three and nine month periods ended September 30, 2002.

Cost of Revenues.Cost of revenues for the Property and
Casualty Recovery Services segment increased 200% for the
quarter ended September 30, 2002 to $0.3 million, from
$0.1 million for the same quarter in 2001, and was $0.8
million for the nine months ended September 30, 2002, an
increase of 167% from $0.3 million for the same period in
2001. As a percentage of claims revenues, cost of revenues
decreased to 127% for the quarter ended September 30, 2002
compared to 269% for the same quarter in 2001. For the nine
months ended September 30, 2002, the cost of revenues as a
percentage of revenue decreased to 189% from 303% in 2001. The
increase in cost of revenues 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 September 30, 2002 from
$0.2 million for the same quarter in 2001 and were
$0.3 million for the nine months ended September 30,
2002 compared to $0.5 million for the comparable period in
2001. Support expenses decreased as a percentage of claims
revenues from 471% for the first quarter of 2001 to 44% for the
same quarter in 2002. For the nine months ended
September 30, 2002, support expenses as a percentage of
claims revenues were 80%, a decrease from 478% in the comparable
period of 2001. The decrease in support expenses as a percentage
of claims revenues resulted from the increase in revenue
described above and 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 sells 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. The

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##### Table of Contents



Company believes that, like the health insurance
market, 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. During the three months ended June 30, 2002,
the Company made its first sale of the Troveris software to an
outside party (United Medical Resources). Additionally, the
Company has received indications of interest from other
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 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 currently 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 third quarter of 2003. After migration is
complete, 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 the Companys
Quarterly Report on Form 10-Q for the quarter ended
March 31, 2002, 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 and Nine Months Ended September 30,
2002 Compared to Three and Nine Months Ended September 30,
2001

Revenues.The
Software segment recognized $232,000 and $512,000 in revenue
during the three and nine months ended September 30, 2002,
respectively, all derived internally except for $1,000.

Cost of revenues.Cost of revenues for the Software
segment for the three and nine months ended September 30,
2002 was approximately $162,000 and $425,000, respectively. This
includes approximately $126,000 and $313,000 for the three and
nine month periods ended September 30, 2002, respectively,
of depreciation and amortization of software in service.
Approximately $36,000 and $112,000 of the cost of revenues for
the three and nine month periods ended September 30, 2002,
respectively, relates to the support and maintenance of the
software.

Support expenses.For the three and nine months ended
September 30, 2002, the Software segment incurred
approximately $525,000 and $1.4 million, respectively, in
expenditures in connection with the creation of new products for
the insurance industry. Approximately $328,000 of support
expenditures were capitalized in the quarter ended
September 30, 2002, resulting in net reported expenses of
approximately $197,000. During the nine months ended
September 30, 2002, approximately $874,000 of support
expenditures were capitalized, resulting in net reported
expenses of $559,000.

The Company expects to incur additional expenses
of between $300,000 and $400,000 for research and development
with respect to the creation of enhancements of existing
software applications over the remainder

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##### Table of Contents



of 2002, of which approximately $200,000 is
expected to be capitalized. In addition, as of
September 30, 2002, the Company has capitalized
approximately $2.1 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.


Entire Company

Statements of Income as a Percentage of
Revenues

|                                       |  |                    |       |                   |  |      |       |      |  |  |       |   |  |  |       |  
|-------------------------------------- |  | ------------------ | ----- | ----------------- |  | ---- | ----- | ---- |  |  | ----- | - |  |  | ----- | -
|                                       |  |                    |       |                  
|                                       |  | Three Months Ended |       | Nine Months Ended
|                                       |  | September 30,      |       | September 30,    
|                                       |  |                    |       |                  
|                                       |  | 2002               |       | 2001              |  | 2002 |       | 2001
|                                       |  |                    |       |                   |  |      |       |     
|Claims revenues                        |  |                    | 100.0 | %                 |  |      | 100.0 | %    |  |  | 100.0 | % |  |  | 100.0 | %
|Cost of revenues                       |  |                    | 48.7  |                   |  |      | 50.7  |      |  |  | 48.5  |   |  |  | 49.0  |  
|Support expenses                       |  |                    | 28.2  |                   |  |      | 26.4  |      |  |  | 28.4  |   |  |  | 27.5  |  
|Depreciation and amortization          |  |                    | 6.7   |                   |  |      | 11.2  |      |  |  | 7.0   |   |  |  | 10.4  |  
|Research and development               |  |                    |      |                   |  |      | 0.8   |      |  |  |      |   |  |  | 0.9   |  
|Operating income                       |  |                    | 16.5  |                   |  |      | 10.9  |      |  |  | 16.0  |   |  |  | 12.2  |  
|Other  loss on property held for sale |  |                    |      |                   |  |      | 6.5   |      |  |  |      |   |  |  | 2.1   |  
|Interest (expense) income, net         |  |                    | (0.3  | )                 |  |      | (0.5  | )    |  |  | (0.4  | ) |  |  | (0.0  | )
|Income before income taxes             |  |                    | 16.2  |                   |  |      | 3.9   |      |  |  | 15.7  |   |  |  | 10.1  |  
|Net income                             |  |                    | 10.0  |                   |  |      | 6.8   |      |  |  | 9.7   |   |  |  | 7.4   |  

Employees

|                  |  |                    |     |                   |  |      |     |      |  |  |     |  |  |  |     | 
|----------------- |  | ------------------ | --- | ----------------- |  | ---- | --- | ---- |  |  | --- |  |  |  | --- | 
|                  |  |                    |     |                  
|                  |  | Three Months Ended |     | Nine Months Ended
|                  |  | September 30,      |     | September 30,    
|                  |  |                    |     |                  
|                  |  | 2002               |     | 2001              |  | 2002 |     | 2001
|                  |  |                    |     |                   |  |      |     |     
|Direct operations |  |                    | 536 |                   |  |      | 563 |      |  |  | 536 |  |  |  | 563 | 
|Support           |  |                    | 155 |                   |  |      | 142 |      |  |  | 155 |  |  |  | 142 | 
|                  |  |                    |     |                   |  |      |     |      |  |  |     |  |  |  |     | 
|Total employees   |  |                    | 691 |                   |  |      | 705 |      |  |  | 691 |  |  |  | 705 | 
|                  |  |                    |     |                   |  |      |     |      |  |  |     |  |  |  |     | 

Depreciation and Amortization.Depreciation and amortization expense
decreased 29.9% to $1.2 million for the quarter ended
September 30, 2002 from $1.7 million for the same
quarter in 2001, and decreased 24.5% to $3.7 million for
the nine months ended September 30, 2002 from
$4.9 million for the comparable period in 2001. The
decreases were 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 $124,000 and
$415,000 for the three and nine months ended September 30,
2001, respectively, related to research and development
activities in connection with the creation of new products for
the insurance industry. There are no research and development
expenses in the three and nine months ended September 30,
2002 because the products that were in development in 2001
became operational in 2002. See Software 
Overview of Operations.

Interest Income.Interest income decreased 41.2%, or
$47,000, for the quarter ended September 30, 2002 as
compared to the same quarter in 2001. For the nine months ended
September 30, 2002, interest income decreased $537,000, or
73.6%, from $730,000 to $193,000. The decreases were due to the
payment, during the quarter ended June 30, 2001, of an
earn-out relating to an acquisition which reduced the restricted
cash balance and to lower interest rates.

Interest Expense.Interest expense totaled approximately
$115,000 and $379,000 for the three and nine months ended
September 30, 2002, respectively. The decreases in interest
expense for the three and nine

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months ended September 30, 2002, as compared with
the same periods in 2001, were primarily due to a decrease in
borrowed funds resulting from the release of restricted cash in
July 2001, the proceeds from the sale of the Milwaukee building
in November 2001 and to lower interest rates in 2002.


Tax.The Company
accrued its income tax at an effective rate of 38.0% and 38.2%
for the three and nine months ended September 30, 2002,
respectively. These rates are lower than the Companys
historical effective income tax rate due to research and
experimental tax credits, which includes a one-time recapture
for the previous four tax years, and state tax planning
initiatives implemented during 2002.

In September 2001, the Company concluded that, in
light of the passage of time with respect to the filing of the
Companys tax returns for years up to and including 1997,
it was proper to reverse previously accrued taxes reducing the
tax provision for the three months ended September 30, 2001
by $681,000, net, or approximately $0.07 per share. This accrual
related primarily to certain non-cash compensation charges taken
in connection with the initial public offering of the
Companys stock in 1997. Management believes that adequate
amounts of tax and related interest and penalties, if any, have
been provided for any adjustments that may result.

Net Income.Net
income for the quarter ended September 30, 2002 increased
$765,000, or 74.7%, to $1.8 million, or $0.19 per diluted
common share, from $1.0 million, or $0.10 per diluted
common share, for the comparable quarter in 2001. For the nine
months ended September 30, 2002, net income increased 46.9%
to $5.1 million, or $0.53 per diluted common share, from
$3.5 million, or $0.35 per diluted common share, for the
comparable period in 2001. The primary reasons for the increases
in net income and diluted earnings per share were: the loss on
the disposal of the Milwaukee building ($573,000 after tax)
during the three months ended September, 30, 2001, the reversal
of previously accrued income taxes described above under
Tax, the adoption of FAS 142 as described above
under Depreciation and Amortization and the incremental
Healthcare Recovery Services revenue from the UHG contract
termination. See Concentration of Clients.

Liquidity and Capital Resources

The Companys statements of cash flows for
the nine months ended September 30, 2002 and 2001 are summarized
below:

|                                          |  |                   |        |      |  |   |        |  
|----------------------------------------- |  | ----------------- | ------ | ---- |  | - | ------ | -
|                                          |  |                  
|                                          |  | Nine Months Ended
|                                          |  | September 30,    
|                                          |  |                  
|                                          |  | 2002              |        | 2001
|                                          |  |                   |        |     
|                                          |  |                  
|                                          |  | (In thousands)   
|Net cash provided by operating activities |  | $                 | 9,784  |      |  | $ | 2,242  |  
|Net cash used in investing activities     |  |                   | (3,318 | )    |  |   | (267   | )
|Net cash used in financing activities     |  |                   | (7,557 | )    |  |   | (2,019 | )
|                                          |  |                   |        |      |  |   |        |  
|Net decrease in cash and cash equivalents |  | $                 | (1,091 | )    |  | $ | (44    | )
|                                          |  |                   |        |      |  |   |        |  

The Company had working capital of
$8.5 million at September 30, 2002, including cash and
cash equivalents of $1.5 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
$9.8 million, an increase of $7.5 million for the nine
months ended September 30, 2002, compared to the same nine
months in 2001, primarily as a result of the payment of
$3.0 million during the quarter ended September 30,
2001 relating to a lawsuit. The Company also paid the second
year earnout relating to the acquisition of Subro-Audit, Inc.,
and a related entity, ODonnell Leasing Co., LLP, during
the nine months ended September 31, 2001, a net cash use of
$914,000 for that period. Additionally, the accounts receivable
balance increased $379,000 during the nine months ended
September 30, 2002 due to increased revenues from the
provider bill audit division. During the nine months ended
September 30, 2001, the accounts receivable balance
increased approximately $2.0 million due to slow payments
by clients in the provider bill audit division. Income taxes
payable provided cash of $607,000 during the nine months ended
September 30, 2002 due to the accrual of income taxes. For
the nine months ended

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September 30, 2001, the Company had a
reduction of $396,000 from the income taxes payable due
primarily to the reversal of previously accrued income taxes in
the amount of $681,000.


Net cash used in investing activities includes
purchases of property and equipment principally related to the
development of and conversion to the Troveris software. During
the nine month periods ended September 30, 2002 and 2001,
the Company capitalized approximately $1.5 million and
$1.4 million of internally-developed software,
respectively. During the nine months ended September 30,
2001, approximately $2.6 million which had been included as
restricted cash to pay earnouts related to the SAI acquisition
was released from restricted cash into operating cash as the
earnouts had been paid in full.

Net cash used in financing activities for the
nine months ended September 30, 2002 and 2001, reflects
$2.5 million in net cash payments and $2.0 million in
net cash payments, respectively, with respect to the
Companys Revolving Credit Facility. The Company purchased
approximately $5.1 million and $79,000 of treasury stock
during the nine months ended September 30, 2002 and 2001,
respectively.

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 September 30, 2002,
the interest rate was 3.56% 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 September 30,
2002, $5.5 million was outstanding under the Revolving
Credit Facility. (See Item 1. Financial Statements
(Unaudited)  Note 4  Credit
Facility and  Note 10 
Derivatives.)

At September 30, 2002 and December 31,
2001, the Company reported on its balance sheets, as a current
asset, restricted cash of $17.6 million and
$18.0 million, respectively. Restricted cash at
September 30, 2002 and December 31, 2001 represented
claims recoveries by the Company for its clients. At
September 30, 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
from time to time assesses 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.

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

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altering the costs of healthcare and the
environment for the sale or delivery of medical claims recovery
and cost containment services. The Company is unable to predict
which of these factors, if any, could have a potentially
material impact on healthcare payors and through them, the
healthcare recovery and cost containment industry.


Concentration of Clients

The Company provides services to healthcare plans
that as of September 30, 2002 covered approximately
41.8 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 each of the nine month periods ended
September 30, 2002 and 2001, UHG generated 27% of the
Companys revenues. Wellpoint Health Networks accounted for
14% and 10% of the Companys revenues for the nine month
periods ended September 30, 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 September 30, 2002, the Company
had Healthcare Recovery Services backlog of
$1,531.0 million.

During the second quarter of 2002, UHG informed
the Company of its intention to terminate subrogation services
with respect to all but approximately 1 million lives of
the 9.7 million then 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 continue recovering on the backlog
created for UHG (and for the plans and employer groups that UHG
services), a process that the Company expects will be completed
in 5 to 6 years. UHG is the Companys largest client,
accounting for 27% of its total revenue in 2001.

The Companys contract with UHG will expire
in accordance with its terms on February 1, 2003. Although
the Company and UHG were in discussions, previously announced,
over a six-month extension of the termination schedule, no such
extension was agreed upon.

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 nine
months ended September 30, 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.

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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.
During the three months ended June 30, 2002, the Company
performed the transitional impairment test under FAS 142
for all goodwill recorded as of January 1, 2002 which did
not result in an impairment charge.

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 believes that the adoption of FAS 143
will not have a significant impact 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 adoption of FAS 144 had no significant
impact on the Companys financial position or results of
operations.

In July 2002, the FASB issued Statement of
Financial Accounting Standards No. 146 (FAS 146),
Accounting for Exit or Disposal Activities.
FAS 146 addresses the recognition, measurement, and
reporting of costs that are associated with exit and disposal
activities, including costs related to terminating a contract
that is not a capital lease and termination benefits that
employees who are involuntarily terminated receive under the
terms of a one-time benefit arrangement that is not an ongoing
benefit arrangement or an individual deferred-compensation
contract. FAS 146 supersedes Emerging Issues Task Force Issue
No. 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring) and
requires liabilities associated with exit and disposal
activities to be expensed as incurred. FAS 146 will be
effective for exit or disposal activities of the Company that
are initiated after December 31, 2002. The Company believes
that the adoption of FAS 146 will not have a significant
impact on its financial statements.

Stock Repurchase Plan

The Companys Board of Directors authorized
the repurchase of up to $20 million of the Companys
Common Stock in the open market, including $10 million
authorized on May 10, 2002, 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 $20 million of the
Companys Common Stock or until it otherwise determines to
terminate the stock repurchase plan. The Company repurchased
362,800 and 1,025,243 shares of its own stock during the
three and nine months ended

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September 30, 2002, respectively, at an
average price of $4.28 and $5.00, respectively. From inception
of the program through September 30, 2002, the total number
of repurchased shares is 2,817,508 at a cost of
$12.2 million, or an average cost of $4.35 per share.
Except for 10,000 shares previously repurchased but
re-issued in connection with an employee restricted stock award,
all of the reacquired shares of Common Stock through
September 30, 2002 are reflected as treasury stock on the
accompanying Condensed Balance Sheets (Unaudited).





Item 3.     Quantitative
and Qualitative Disclosures About Market Risk

An element of market risk exists for the Company
from changes in interest rates related to its Revolving Credit
Facility, which matures October 31, 2004. The impact on
earnings and the 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 September 30, 2002, the Company had
$5.5 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 $1.5 million outstanding had an interest rate of
3.56%. See Item 1. Financial Statements
(Unaudited)  Note 13  Concentration
of Clients and Item 2. Managements
Discussion and Analysis of Financial Condition and Results of
Operations  Liquidity and Capital Resources.




Item 4.     Controls
and Procedures

Based on their evaluation of the Companys
disclosure controls and procedures (as defined in
Rules 13a-14 and 15d-14 under the Securities Exchange Act
of 1934), as of a date within 90 days of the filing of this
Form 10-Q, the Companys Chief Executive Officer and
Chief Financial Officer have concluded that these controls and
procedures are effective. There have been no significant changes
in internal controls or in other factors that could
significantly affect these controls subsequent to the date of
their evaluation, nor have there been any significant
deficiencies or material weaknesses. As a result, no corrective
actions were required or undertaken.

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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 third 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.

In November 1999, the Company filed a motion to
dismiss the Amended Complaint. In June 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 then
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 a report dated March 20, 2002, the Chief
Magistrate Judge recommended denial of the motion to certify a
class. On June 5, 2002, the court entered an order adopting
the Chief Magistrate Judges report and recommendation in
its entirety and denying class certification. Plaintiffs
time to seek leave to file an interlocutory appeal from that
ruling has expired.

In October 2002, the Company and the two named
plaintiffs reached an agreement in principle to settle all
claims in the lawsuit under terms that would not require any
payment by the Company and would not

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impact the Companys operations in any
respect. The parties are currently working to formalize the
agreement in writing, but have not yet executed a final binding
settlement agreement.


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 November 1999, and has answered, denying all
allegations. The court has not yet addressed the question of
whether to certify the putative class. After the defendants
filed a motion for summary judgment in January 2002, the
plaintiff moved the court to delay consideration of the motion
until plaintiff could complete additional discovery. The
plaintiffs motion to delay consideration was granted and
discovery is in progress. On October 25, 2002, the
plaintiff filed an amended petition naming one additional
plaintiff as a purported class representative. The amended
petition does not add any new claims. The Company is reviewing
the amended petition and has not yet filed a formal response.

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. In January
2000, the defendants filed a motion to dismiss the Complaint.

In response to the defendants motion, in
February 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. In March 2001,
the Company filed an answer to the Complaint denying all of the
plaintiffs allegations. Also in March 2001, the plaintiff
filed a motion to alter or

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amend the courts ruling on the motion to
dismiss. On July 15, 2002, the court denied
plaintiffs motion to alter or amend the courts
ruling on the motion to dismiss. The court has not addressed the
issue of class certification.


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

In December 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 Carolina, Estalita Martin et
al. vs. Companion Health Care Corp., and Healthcare
Recoveries, Inc.In January 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 and in June 2001 the court granted the Companys
motion to dismiss. Plaintiffs filed a notice of appeal in July
2001. All parties have filed briefs, but the appellate court has
not yet ruled on plaintiffs appeal of the dismissal, nor
has oral argument been scheduled.

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. In July 2001, the court granted a motion for
summary judgment filed by the Company as concerned the
plaintiffs Fair Debt Collection Practices Act
(FDCPA) 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. In August
2001, the court ruled that it lacked subject matter
jurisdiction, thus dismissing the remaining claims,

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without prejudice. Plaintiff filed an appeal to
the United States Fifth Circuit Court of Appeals. On
November 1, 2002, the Court of Appeals rendered its opinion
reversing the dismissal of the FDCPA claims. The court also
affirmed the trial courts determination that diversity
jurisdiction did not exist in the case. The court remanded the
case to the federal district court for further proceedings. The
time in which the Company may seek rehearing or further appeal
has not expired, and the Company is now reviewing the opinion.
The Company disputes the plaintiffs allegations regarding
the applicability of the FDCPA and intends to vigorously defend
its position in this case.


In addition to filing the appeal in federal
court, the Hamiltonplaintiff in October 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. In November 2001, the Company filed
preliminary exceptions to this new complaint.

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. Each defendant filed a motion to
dismiss the action. On October 2, 2002, the Court granted
each of the defendants motions and dismissed the
Plaintiffs action entirely. Plaintiff filed a timely
appeal.

The Cajas, Franks and Martinlawsuits, 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
Rogalla lawsuits, or any one or more of them, if
successful, could require the Company to refund, on behalf of
its clients, recoveries in a material number of cases. In
addition, an adverse outcome in any of the above referenced
lawsuits could impair materially the Companys ability to
assert subrogation or reimbursement claims on behalf of its
clients in the future. Based on the current disposition of these
lawsuits, the Company regards such an adverse outcome to be a
remote possibility.

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.

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




Item 6.     Exhibits
and Reports on Form 8-K

(a) Exhibits

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

|     |  |   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|---- |  | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1  |  |  |  | Restated Certificate of Incorporation of the
    Registrant (incorporated by reference to Exhibit 3.1 of the
    Registrants Quarterly Report on Form 10-Q for the
    quarter ended June 30, 2002).                                                                                                                                                                                                                                                                           
|3.2  |  |  |  | Amended and Restated Bylaws of the Registrant
    (incorporated by reference to Exhibit 3.2 of
    Registrants Annual Report on Form 10-K for the fiscal
    year ended December 31, 2000).                                                                                                                                                                                                                                                                                    
|4.1  |  |  |  | Specimen Common Stock Certificate (incorporated
    by reference to Exhibit 4.1 of Registrants Amendment
    No. 1 to Registration Statement on Form S-1, File
    No. 333-23287).                                                                                                                                                                                                                                                                                             
|4.2  |  |  |  | Rights Agreement, dated February 12, 1999,
    between the Registrant and National City Bank of Kentucky, as
    Rights Agent, which includes as Exhibit A the Form of
    Certificate of Designations of the Preferred Stock, as
    Exhibit B the Form of Right Certificate and as
    Exhibit C the Summary of Rights to Purchase Preferred Stock
    (incorporated by reference to Exhibit 4.1 of
    Registrants Form 8-A, filed February 16, 1999,
    File No. 0-22585).
|99.1 |  |  |  | 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 (incorporated by
    reference to Exhibit 99.2 of Registrants Quarterly
    Report on Form 10-Q for the quarter ended March 31,
    2002).                                                                                                                                                                        
|99.3 |  |  |  | Certifications Pursuant to 18 U.S.C.
    Section 1350, as Adopted Pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                

(b) Reports on Form 8-K

No reports filed during the third quarter of 2002.

30



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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: November 14, 2002 |  | /s/ PATRICK B. MCGINNIS
    --------------------------------------------------------
    Patrick B. McGinnisChairman, President and Chief Executive Officer                                                
|                       
|Date: November 14, 2002 |  | /s/ DOUGLAS R. SHARPS
    --------------------------------------------------------
    Douglas R. SharpsExecutive Vice President and Chief Financial Officer
    Principal Financial and Accounting Officer

31



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##### Table of Contents



CERTIFICATIONS

I, Patrick B. McGinnis, certify that:



| |    |                                                                                                                                                                                                                                                                                                                                                   
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. | I have reviewed this quarterly report on
    Form 10-Q of Trover Solutions, Inc.;                                                                                                                                                                                                                                                                 
|
| | 2. | Based on my knowledge, this quarterly report does
    not contain any untrue statement of a material fact or omit to
    state a material fact necessary to make the statements made, in
    light of the circumstances under which such statements were
    made, not misleading with respect to the period covered by this
    quarterly report;
|
| | 3. | Based on my knowledge, the financial statements,
    and other financial information included in this quarterly
    report, fairly present in all material respects the financial
    condition, results of operations and cash flows of the
    registrant as of, and for, the periods presented in this
    quarterly report;                   
|
| | 4. | The registrants other certifying officers
    and I are responsible for establishing and maintaining
    disclosure controls and procedures (as defined in Exchange Act
    Rules 13a-14 and 15d-14) for the registrant and we have:                                                                                                             



| |    |                                                                                                                                                                                                                                                                                                                
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a. | designed such disclosure controls and procedures
    to ensure that material information relating to the registrant,
    including its consolidated subsidiaries, is made known to us by
    others within those entities, particularly during the period in
    which this quarterly report is being prepared;
|
| | b. | evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this
    quarterly report (the Evaluation Date); and                                                                                                      
|
| | c. | presented in this quarterly report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                



| |    |                                                                                                                                                                                                                                                               
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 5. | The registrants other certifying officers
    and I have disclosed, based on our most recent evaluation, to
    the registrants auditors and the audit committee of
    registrants board of directors (or persons performing the
    equivalent function):



| |    |                                                                                                                                                                                                                                                                                                                   
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a. | all significant deficiencies in the design or
    operation of internal controls which could adversely affect the
    registrants ability to record, process, summarize and
    report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b. | any fraud, whether or not material, that involves
    management or other employees who have a significant role in the
    registrants internal controls; and                                                                                                                                                    



| |    |                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 6. | The registrants other certifying officers
    and I have indicated in this quarterly report whether or not
    there were significant changes in internal controls or in other
    factors that could significantly affect internal controls
    subsequent to the date of our most recent evaluation, including
    any corrective actions with regard to significant deficiencies
    and material weaknesses.

|                        |  |                                                                                                                                                            
|----------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------
|                       
|Date: November 14, 2002 |  | /s/ PATRICK B. MCGINNIS
    --------------------------------------------------------
    Patrick B. McGinnisChairman, President and Chief Executive Officer

I, Douglas R. Sharps, certify that:



| |    |                                                                                                                                                                                                          
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. | I have reviewed this quarterly report on
    Form 10-Q of Trover Solutions, Inc.;                                                                                                                        
|
| | 2. | Based on my knowledge, this quarterly report does
    not contain any untrue statement of a material fact or omit to
    state a material fact necessary to make the statements made, in
    light of the

32



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##### Table of Contents



| |    |                                                                                                                                                                                                                                                                                                                                
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    | circumstances under which such statements were
    made, not misleading with respect to the period covered by this
    quarterly report;                                                                                                                                                                                       
|
| | 3. | Based on my knowledge, the financial statements,
    and other financial information included in this quarterly
    report, fairly present in all material respects the financial
    condition, results of operations and cash flows of the
    registrant as of, and for, the periods presented in this
    quarterly report;
|
| | 4. | The registrants other certifying officers
    and I are responsible for establishing and maintaining
    disclosure controls and procedures (as defined in Exchange Act
    Rules 13a-14 and 15d-14) for the registrant and we have:                                                                                          



| |    |                                                                                                                                                                                                                                                                                                                
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a. | designed such disclosure controls and procedures
    to ensure that material information relating to the registrant,
    including its consolidated subsidiaries, is made known to us by
    others within those entities, particularly during the period in
    which this quarterly report is being prepared;
|
| | b. | evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this
    quarterly report (the Evaluation Date); and                                                                                                      
|
| | c. | presented in this quarterly report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                



| |    |                                                                                                                                                                                                                                                               
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 5. | The registrants other certifying officers
    and I have disclosed, based on our most recent evaluation, to
    the registrants auditors and the audit committee of
    registrants board of directors (or persons performing the
    equivalent function):



| |    |                                                                                                                                                                                                                                                                                                                   
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a. | all significant deficiencies in the design or
    operation of internal controls which could adversely affect the
    registrants ability to record, process, summarize and
    report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b. | any fraud, whether or not material, that involves
    management or other employees who have a significant role in the
    registrants internal controls; and                                                                                                                                                    



| |    |                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 6. | The registrants other certifying officers
    and I have indicated in this quarterly report whether or not
    there were significant changes in internal controls or in other
    factors that could significantly affect internal controls
    subsequent to the date of our most recent evaluation, including
    any corrective actions with regard to significant deficiencies
    and material weaknesses.

|                        |  |                                                                                                                                                                                                            
|----------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                       
|Date: November 14, 2002 |  | /s/ DOUGLAS R. SHARPS
    --------------------------------------------------------
    Douglas R. SharpsExecutive Vice President and Chief Financial Officer
    Principal Financial and Accounting Officer

33