##### Table of Contents









UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549




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FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS


PURSUANT TO SECTIONS 13 OR 15(d) OF THE


SECURITIES EXCHANGE ACT OF 1934


|           |  |                                                                                                 
|---------- |  | ------------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                                 
|          
|          
|          
|          
|[X]        |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
    15(d) OF
    THE SECURITIES EXCHANGE ACT OF 1934    
|           |  | For the fiscal year ended December 31,
    2003                                                 
|           |  | OR                                                                                              
|          
|          
|          
|          
|[  ]       |  | 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

TROVER SOLUTIONS, INC.


(Exact Name of Registrant as Specified in its
Charter)


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|Delaware                                                               |  | 61-1141758                                   
|(State or Other Jurisdiction of
    Incorporation or Organization)     |  | (I.R.S. Employer
    Identification Number)  
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|1600 Watterson Tower
    Louisville, Kentucky                          |  | 40218                                        
|(Address of principal executive
    offices)                           |  | (Zip Code)                                   
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|(502) 454-1340(Registrants telephone
    number, including area code)
|Securities registered pursuant to
    Section 12(b) of the Act        
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|Title of Each Class                                                    |  | Name of Each Exchange
    On Which Registered
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|None                                                                   |  |                                              

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

Title of Class





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

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

The aggregate market value of Registrants Common Stock
held by non-affiliates of the Registrant as of the last day of
the Registrants most recently completed second fiscal
quarter was approximately $48,867,855 (based on the last sale
price of a share of Common Stock as of June 30, 2003
($5.79)), as reported by The Nasdaq National Market.

As of March 15, 2004, 8,494,977 shares of the
Registrants Common Stock, $0.001 par value, were
outstanding.



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TABLE OF CONTENTS

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|Part I                                          
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|1.                                               |  | Business                                                                                               |  |                                              | 1  | 
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|2.                                               |  | Properties                                                                                             |  |                                              | 15 | 
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|3.                                               |  | Legal Proceedings                                                                                      |  |                                              | 15 | 
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|4.                                               |  | Submission of Matters to a
    Vote of Security Holders                                                |  |                                              | 21 | 
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    Risk Factors |    |  | 21 | 
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|Part II                                         
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|5.                                               |  | Market for Registrants
    Common Equity and Related Stockholder Matters                              |  |                                              | 21 | 
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|6.                                               |  | Selected Financial Data                                                                                |  |                                              | 22 | 
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|7.                                               |  | Managements Discussion
    and Analysis of Financial Condition and Results of Operations              |  |                                              | 23 | 
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|7A.                                              |  | Quantitative and Qualitative
    Market Risk Disclosures                                               |  |                                              | 40 | 
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|8.                                               |  | Financial Statements and
    Supplementary Data                                                        |  |                                              | 41 | 
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|9.                                               |  | Changes in and Disagreements
    with Accountants on Accounting and Financial Disclosures              |  |                                              | 65 | 
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|9A.                                              |  | Controls and Procedures                                                                                |  |                                              | 65 | 
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|Part III                                        
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|10.                                              |  | Directors and Executive
    Officers of the Registrant                                                 |  |                                              | 65 | 
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|11.                                              |  | Executive Compensation                                                                                 |  |                                              | 69 | 
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|12.                                              |  | Security Ownership of
    Certain Beneficial Owners and Management and Related Stockholder
    Matters |  |                                              | 77 | 
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|13.                                              |  | Certain Relationships and
    Related Transactions                                                     |  |                                              | 81 | 
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|14.                                              |  | Principal Accountant Fees
    and Services                                                             |  |                                              | 82 | 
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|Part IV                                         
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|15.                                              |  | Exhibits, Financial
    Statement Schedules and Reports on Form 8-K                                    |  |                                              | 83 | 
|EX-4.3 FIRST AMENDMENT TO RIGHTS AGREEMENT      
|EX-23.1 CONSENT OF PRICEWATERHOUSECOOPERS LLP   
|EX-31.1 SECTION 302 CERTIFICATION OF THE CEO    
|EX-31.2 SECTION 302 CERTIFICATION OF THE CFO    
|EX-32 SECTION 906 CERTIFICATION OF THE CEO & CFO
|EX-99.1 SAFE HARBOR COMPLIANCE STATEMENT        



THIS FORM 10-K AND OTHER STATEMENTS ISSUED OR MADE FROM
TIME TO TIME BY THE COMPANY OR ITS MANAGEMENT TEAM CONTAIN
STATEMENTS WHICH MAY CONSTITUTE FORWARD-LOOKING
STATEMENTS WITHIN THE MEANING OF THE SECURITIES ACT OF
1933, AS AMENDED, 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 THE COMPANY 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 THIS FORM 10-K, AND ARE HEREBY
INCORPORATED HEREIN BY REFERENCE. THE COMPANY 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.

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PART I




Item 1.Business

General

Trover Solutions, Inc. (hereinafter referred to as the
Company), a Delaware corporation, believes, based on
its experience and assessment of its market, that it is a
leading independent provider of outsourcing of subrogation and
certain other medical claims recovery and cost containment
services to the U.S. private healthcare payor industry and of
outsourcing of subrogation recovery services to the U.S.
property and casualty insurance industry. 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 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), (2) the recovery of
overpayments attributable to duplicate payments, failures to
coordinate benefits and similar errors in payment
(overpayments), and (3) the auditing of
physician evaluation and management claims for consistency with
medical records, in accordance with federal guidelines (MD
audit). 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 Inc. and The Principal Financial Group.
The Company had 39.9 million and 41.6 million lives
under contract from its clientele at December 31, 2003 and
2002, respectively.

The Company has three segments: (1) Healthcare Recovery
Services, which encompasses its four healthcare recovery
products: healthcare subrogation, provider bill audit,
overpayments, and MD audit; (2) Property and Casualty
Recovery Services, which is subrogation recovery services for
property and casualty insurers, sold under the brand name
TransPaC Solutions; and (3) Software, which is subrogation
recovery software in a browser-based application service
provider (ASP) form, sold under the name Troveris. See
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations  Healthcare
Recovery Services,  Property and Casualty
Recovery Services,  Software and
Item 8. Financial Statements and Supplementary
Information  Note 15  Segment
Information for financial information about the
Companys segments. See Exhibit 99.1 for a discussion
of certain risk factors relating to the Company.

Recent Developments

On February 20, 2004, the Company announced that it had
entered into a definitive agreement to be acquired in an
all-cash transaction in which TSI Acquisition Co., Inc., a
wholly-owned subsidiary of TSI Holding Co., Inc., will be merged
into the Company. TSI Holding Co., Inc. is an affiliate of
Tailwind Capital Partners LLC (Tailwind), which manages Thomas
Weisel Capital Partners, L.P., a private equity fund. As a
result of the merger (the Proposed Transaction),
every stockholder of the Company will receive $7.00 per share in
cash, except that certain members of management will obtain new
stock option grants by TSI Holding Co., Inc. (which will be the
parent corporation of the surviving entity), may exchange
unexercised in the money stock options of the
Company for stock options of TSI Holding Co., Inc., and may
purchase shares of common stock of TSI Holding Co., Inc. at
$7.00 per share. Immediately following the Proposed Transaction,
TSI Holding Co., Inc. will be owned by Tailwind, certain members
of management of the Company, and certain co-investors.

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If completed, the Proposed Transaction will constitute a going
private transaction and will result in the Company no longer
being publicly traded and no longer filing annual, quarterly and
current reports with the Securities and Exchange Commission
(SEC). The Proposed Transaction must be approved by
the Companys stockholders at a special meeting of the
stockholders, which the Company expects will occur in the second
quarter of 2004. The Proposed Transaction is also subject to
customary closing conditions. The obligation of Tailwind to
proceed under the definitive agreement expires if the Company is
unable to close the Proposed Transaction by July 15, 2004.
More information on the Proposed Transaction is included in the
proxy statement that the Company will mail to its stockholders
in connection with the special meeting of the stockholders at
which the Proposed Transaction will be voted on.

Organizational Structure

The Company, which was co-founded by its present Chief Executive
Officer, was incorporated on June 30, 1988 under the laws
of the State of Delaware. The Company became publicly held as a
result of an initial public offering in May 1997 and is traded
on The Nasdaq National Market under the symbol TROV.

Strategy

The Company has been pursuing a two-fold growth strategy. First,
with respect to its existing healthcare recovery services and
property and casualty recovery segments, the Company focuses on
(i) servicing its existing client base, (ii) selling
and installing the additional business covered by contracts with
existing clients and (iii) selling and installing new
clients and cross-selling expanded product offerings. During
2000, the Company placed in service and began to earn revenue
from an internally developed service that offers its clients the
ability to detect, audit and recover a variety of claims
overpayments. During 2002, the Company began a new division that
audits physician evaluation and management claims.

Under the second aspect of its growth strategy, the Company has
been extending its systems-driven, process-oriented approach,
through acquisitions and internal development, to new
outsourcing products and services in the insurance industry,
including both healthcare and property and casualty. The
defining characteristics of the Companys business model
are (i) the ability to automate clerical and administrative
tasks, using sophisticated and proprietary computer
applications; and (ii) the ability to standardize and scale
work using process management and classical work measurement
techniques. Using this model, the Company believes that it can
dramatically increase the productivity of the skilled knowledge
workers who make up its labor force, and successfully implement
pricing strategies that will reward the Company for those
productivity gains.

The Company believes that any future development opportunities
are likely to be characterized by outsourcing business services
that will produce predictable and recurring revenue streams;
competitive advantages from effective process management,
proprietary systems and the provision of knowledge-rich
services; the development of niche markets; value-based pricing;
and a non-exclusive focus on healthcare information services.

Industry



| |        
| | -------
| | General

The Companys main focus of business is the provision,
through its three segments, of cost containment services and
software for the insurance industry. The first of these
segments, Healthcare Recovery Services, offers four recovery
services on an outsourcing basis to healthcare payors,
specifically indemnity insurers, managed care and health
maintenance organizations, and self-funded employers. The second
segment, Property and Casualty Recovery Services, provides
subrogation recovery services to the property and casualty
(P&C) industry, with a focus on full
outsourcing. With respect to its healthcare recovery services
and P&C recovery services, the Company believes that in
recent years businesses have increasingly delegated
(outsourced) non-core specialized business functions
to third parties. Because of expertise and economies of scale,
companies that provide specialized services are often able to
deliver the requisite service at lower costs or with greater
effectiveness than could be achieved by their clients. The
Companys third segment is

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| |                             
| | ----------------------------
| | Healthcare Recovery Services



| |                                                                         
| | ------------------------------------------------------------------------
| | Overview of the Healthcare Recovery Services Operations;
    Outsourcing

Since the late 1980s, healthcare payors have experienced
increasing (i) price competition, (ii) regulatory
complexity and related administrative burdens, (iii) costs
of healthcare claims, and (iv) average age of the insured
population. These factors, resulting from the rapid growth of
managed care, improvements in medical technology,
consumer-oriented political pressure and an aging U.S.
population, tend to result in healthcare payors concentrating
their resources on their core business. This situation, in turn,
provides on-going opportunities for enterprises, like the
Company, which are able to perform non-core business functions
on behalf of healthcare payors.

The recovery process is complex and although many healthcare
payors operate internal recovery departments, the Company
believes that these departments are not generally as effective
per insured life as the Companys operations. The Company
believes that (i) the relatively small size of recoverable
funds as a percentage of claims paid, (ii) the need for
healthcare payors to focus on core competencies and
(iii) the complexity of the recovery process and economies
of scale will continue to provide opportunities for growth of
the Company.

The industry conditions described above have contributed to the
growing need for a cost-effective provider of subrogation and
other recovery products and services. The Companys success
is a result of the implementation of its recovery processes, the
skill and knowledge of its employees, its approach to sales and
marketing, its client base, and its proprietary information
management systems, all as described below.

The Company utilizes recovery processes to implement its cost
containment services, which include subrogation, provider bill
audit, overpayments, and physician bill audit recovery services.
The Company uses proprietary and other software and various
business processes to identify those claims that have recovery
potential. Client-specific threshold dollar amounts are utilized
to identify files where its clients may have a recovery right
for subrogation for the medical benefits provided. In the case
of provider bill audit services, the Company utilizes specific
threshold dollar amounts to investigate proper payment for
medical procedures. To identify overpayment recovery
opportunities, the Company typically analyzes all paid claims
for a fixed period on a rolling quarterly basis. Physician bill
audit services uses payment claims from doctors for their
patient evaluation and management visits to initiate the process
of identifying potential billing errors.

Following the identification and investigation of identified
claims, the Company proceeds to recover from the financially
responsible party the value of those covered medical benefits
provided. The Company has automated this complex processing of
all raw data and the management, follow-up and generation of
correspondence. The use of automated processes substantially
increases productivity and enables specially trained personnel
to focus more intensely on matters requiring their professional
judgment and expertise. The automated processes also allow the
Company to pursue claims that would otherwise be deemed too
small to pursue economically. The Company believes that its
ability to effectively recover a broad range of claim sizes is
an important competitive advantage in the market. In addition to
automating the recovery processes, the Companys
proprietary software and other systems generate significant
operations and management information, which enables the Company
to employ production and quality standards in the context of
providing specialized services.

The Company dedicates staff with specialized skills to
individual services to optimize recoveries. The recovery process
for each healthcare recovery service is described below.



| |                                
| | -------------------------------
| | Healthcare Subrogation Services

Subrogation Recovery Rights of Healthcare Payors.By
contract and state law, healthcare payors are generally entitled
to certain rights with respect to paid healthcare claims that
may be the primary obligation of

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These recovery rights include:



| |                                                                                                                                                                                                                                                         
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (i) the right of subrogation, which allows the healthcare
    payor to recover accident-related medical claims directly from
    the responsible party or the responsible partys insurance
    carrier;                                                
|
| | (ii) the right of reimbursement, which allows the
    healthcare payor to recover from the injured party any payment
    received by him or her from the responsible party or the
    responsible partys insurance carrier relating to this
    injury;
|
| | (iii) the right of reimbursement for medical benefits
    provided for work-related injuries, which are typically excluded
    from the healthcare insurers coverage; and                                                                              
|
| | (iv) other recovery rights against automobile insurers and
    other liability insurers arising from coordination of benefits
    provisions in healthcare and property and casualty insurance
    coverages.                                           

Automated Identification of Claims with Recovery
Potential. The Companys specialty is using systematic
identification methods to determine which files to pass on to
the investigation stage. The automated selection, analysis and
processing of raw claims data are handled primarily through the
Companys proprietary selection software. Information
regarding diagnoses, the cost of treatments, insured
demographics (names, addresses and telephone numbers, etc.) and
related claims is provided to the Company electronically by the
healthcare payor. The automated systems include direct
connections to the Companys clients claims
information systems, subject to various security controls to
limit access internally. The Companys trained staff
identifies, sorts, vets and organizes raw claims data into
usable form, essentially engaging in data mining.

The primary vehicle for the identification of injured insureds
is an automated analysis of the clients claims data. This
system identifies potentially recoverable claims and, using
client-specific protocols, opens an on-line electronic file for
such claims. After files are opened, the systems automatically
track the addition of medical expenses to these files, so that
they are updated as additional expenses are paid. Since its
inception, the Company has automatically opened over 56.5
million of such on-line files.

Investigation of Potentially Recoverable Claims.By
focusing investigations only on those cases with the greatest
potential for recovery, the Company minimizes member contacts
and maximizes recovery potential. Subrogation recoveries are
typically related to accidental injuries. Claims may involve
automobile accidents, property and premises injuries,
workers compensation, product liability or medical
malpractice. When a file of claims reaches a value predetermined
by the Company, the system automatically generates a series of
inquiry letters that are sent to the injured insured. These
individuals respond by calling the Companys customer
service department to provide the facts of the accident. The
Company also initiates phone calls if the insured does not
respond to the inquiry letters in a reasonable period of time.
Historically, approximately 90% of the injured insureds
ultimately respond to the Companys inquiries and
approximately 16% of the claims investigated by customer service
representatives are classified as recoverable. Once a file of
related claims is identified as recoverable, the system updates
the backlog and assigns the file to the appropriate recovery
person who begins the assertion and management of recoverable
claims. Since its inception, the Company has investigated over
10.2 million accidents.

Assertion and Management of Potentially Recoverable
Claims. The workflow performed by the various recovery
personnel is directed and guided step-by-step by the
Companys proprietary and other software. The
Companys systems document activity on the claim files and
provide an interconnected record of correspondence and notes
taken by the recovery personnel with respect to each file. The
Companys recovery personnel

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Once a file of claims is classified as recoverable, the
Companys recovery personnel, who receive extensive
training, proceed to assert the recovery rights of the
Companys clients and track the claims history and
development. The employees contact all necessary parties to
inform them of the existence and value of the recovery claim.
These parties generally include the liability insurer for the
responsible party, the insured and the insureds attorney,
if any, in conjunction with the claim. Recovery personnel
maintain contact with the parties involved, including the
responsible party (or insurance carrier), until the claim is
settled. Settlement may not occur until several years after the
claim was originally paid. During this phase of the recovery
process, approximately 45% of the amounts initially entered into
backlog (the dollar amount of potentially recoverable claims
that the Company is pursuing) as recoverable are rejected, in
which case further activity is terminated and backlog is reduced.

Negotiation and Settlement of Claims.The recovery
process culminates in the negotiation and settlement of claim
files. Within the settlement guidelines established by each
client and the Companys standard operating procedures,
recovery personnel close recoverable files and remove them from
backlog by making recoveries or by rejecting files and
terminating recovery efforts. Once a settlement is made and
recorded in the system, receipt of cash is anticipated and
monitored by the responsible employee. Cash receipts are posted
to the credit of the appropriate client.

Claims remain the property of the Companys clients and
litigation is commenced solely at their written direction.
Similarly, clients may terminate litigation or other recovery
efforts at any time for any reason. The Company customarily
bears the cost of legal services as part of the services to its
clients. The Company has established what it believes are
cost-effective relationships with providers of legal services,
including its relationship with Sharps & Associates,
PSC, a law firm solely owned by Douglas R. Sharps, the
Companys Executive Vice President  Finance and
Administration, Chief Financial Officer and Secretary. 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. This law firm employs
27 attorneys, 13 paralegals and 1 administrative
assistant at its offices in Louisville, Kentucky; Pleasanton,
California; Chicago, Illinois; Tampa, Florida; Dallas, Texas;
Milwaukee, Wisconsin; and Locust Grove, Virginia.
Mr. Sharps receives no financial or other personal benefits
from his ownership of the firm, and the Audit Committee of the
Companys Board of Directors reviews and approves all
payments to Sharps & Associates, PSC. See Item 8.
Financial Statements and Supplementary Data 
Note 5  Related Party Transactions.

Although some healthcare subrogation recoveries will be made
during the first year of service, the average time to make a
recovery is 18 to 24 months from installation, with
substantially all recoveries made by the sixth year. The timing
of recoveries is driven by the P&C payment cycle of claims
(which is the source of recoveries made by the Company) and
circumstances specific to each claim (e.g.,
identification of responsible party, responsiveness of
responsible party, cooperation of parties involved, factual
complexity and litigation). The amount of claims recoveries made
by the Company on behalf of a client is generally less than the
amount of backlog generated on behalf of such client. This
happens for a number of reasons, including (i) the
inadequacy of insurance coverage or other available source of
funds to pay the claim; (ii) the absence of third-party
liability; or (iii) the settlement of the claim for less
than full value in accordance with the Companys
established policies.

Historically, approximately 67% of the Companys recoveries
on behalf of clients involved automobile liability insurance,
14% involved premises liability insurance, 8% involved
workers compensation insurance and 11% involved product
liability or other insurance.



| |                             
| | ----------------------------
| | Provider Bill Audit Services

Provider Bill Audit Rights of Healthcare Payors.By
contract, healthcare payors are generally entitled to certain
audit rights with respect to healthcare claims presented to them
for payment by medical providers.

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Automated Identification of Claims with Recovery
Potential. The Companys database of information
captures over 500 data elements of financial, demographic and
clinical data from members, providers and payors. The Company
utilizes this data to project potential savings outcomes and
pre-screen claims for its various audit services. Provider
contract terms are also programmed into the system, which then
reviews claims against the specific contract provisions to
identify discrepancies. The database of statistical information
is refined to include the results of each completed audit.
Provider bill claims are selected for audit based upon
statistical analysis and a comparison to previously audited
claims. Typically, claims with billed charges greater than
specified thresholds are selected for audit. Every claim is
automatically reviewed in a complete, focused audit to refine
selection criteria.

Investigation of Potentially Recoverable Claims.The
Companys provider bill audit service is a process for
establishing accurate billing based on the care and services
documented by healthcare professionals and ordered by the
physician in the medical record as compared to the itemized
billed charges. When a claim is identified, it is automatically
assigned to a nurse auditor who will conduct an audit of all the
line items that make up the claim at the site of the provider.
Based on historical experience, approximately 93% of reviewed
claims generate recoveries.

Assertion and Management of Potentially Recoverable
Claims. The workflow performed by the various audit
personnel is directed and guided step-by-step by the
Companys proprietary and other software. Registered nurses
review provider bills line by line to determine if inaccuracies
exist. This review is completed on-site at the provider facility
where the medical record exists. These audits benefit any health
plan that pays a portion of a claim based on a percent of billed
charges. Nurse auditors review the total claim file to compare
the medical record to the line item bill to ascertain that a
physician ordered the service performed, the supplies billed
were actually used and the medication billed was actually
administered. The nurse auditor also verifies that the billing
is in compliance with the provider contract and that stoploss or
outlier provisions are correctly billed. Historically, provider
bill audits have resulted in savings of approximately 5% to 6%
of the aggregate amount of billed charges audited.

Negotiation and Settlement of Claims.Once the audit is
completed, the Company reviews its findings with a provider
representative to reach agreement. If there is no response from
the provider within forty-five days, the audit results are
considered final and the claim is closed. The savings are
reported to the client for recoupment or the Company will
collect them from the provider.



| |                              
| | -----------------------------
| | Overpayment Recovery Services

Automated Identification of Claims with Recovery
Potential. Healthcare payors are generally entitled to
recover from contract providers amounts that have been paid in
error or where the payors obligation is secondary to that
of another payor (i.e., coordination of benefits).
Examples of errors include payment of claims outside the
coverage contract, duplicate payments, and payments on claims
for persons no longer covered by the payor. The automated
selection, analysis and processing of raw claims data are
handled primarily through the Companys proprietary
selection software. This software identifies potential claims
adjudication errors based on the provisions contained in the
clients various health plan and provider contracts.

Investigation of Potentially Recoverable Claims.Suspected overpayments are identified and classified by
type, then reviewed and researched by experienced claims
analysts, who specialize in particularly complex types of
overpayments, including coordination of benefits and Medicare.
Based on historical experience, approximately 10% of reviewed
claims generate recoveries.

Assertion and Management of Potentially Recoverable
Claims. The workflow performed by the claims recovery
personnel is directed and guided step-by-step by the
Companys proprietary and other software. Suspected
overpayments are verified based upon the claims analysts
research.

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Negotiation and Settlement of Claims.Once an overpayment
is verified, it is forwarded to a unit specializing in
collections for recovery. Historically, approximately 70% of
verified overpayments have been collected. The Company recovers
the money for its clients through its collection function or
reports the overpayments to the client for recoupment from
claims paid to that provider prospectively, where the right of
off-set is present in the payors contract.



| |                              
| | -----------------------------
| | Physician Bill Audit Services

Automated Identification of Claims with Recovery
Potential. The physician bill audit product involves a
review of physician claims to identify instances of potential
over-billing of evaluation and management (E&M)
claims. E&M claims represent physician requests for payment
based on the components of care rendered in connection with
office and hospital visits. In general, physicians charge for
E&M visits based on the intensity level and location
(i.e., office vs. hospital) of the services, and bill
using a standardized method for ranking the intensity level that
is susceptible to error. Healthcare payors are generally
entitled to review the claims from physicians and the associated
patient medical records and to seek correction of billing
errors. The Company has created proprietary software that
automates the selection of appropriate E&M claims for review
and assists in the management of the audit process.

Investigation of Potentially Recoverable Claims.Certified Professional Coders, using the Companys
on-line operational software, audit the relevant patient medical
records in order to verify any billing errors. The audit process
involves applying standardized descriptions of the five
intensity levels for E&M claims, derived from federal
evaluation and management guidelines, to the physicians
own records of such visits.

Negotiation and Settlement of Claims.Once a physician
overcharge is verified, at the clients option, it can be
either referred back to the client for recovery or it can be
retained by the Company for collection.



| |                                        
| | ---------------------------------------
| | Property and Casualty Recovery Services



| |                                                                                
| | -------------------------------------------------------------------------------
| | Overview of Property and Casualty Recovery Services
    Operations; Outsourcing

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 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, the Company believes that
there is an opportunity to increase total subrogation recoveries
across a wide spectrum of automobile insurers. The
Companys marketing strategy is to offer its services to
automobile insurers and multi-line carriers that 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 several of its 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.

Subrogation Recovery Rights of P&C Insurers.By
contract and law, P&C insurers typically have a standard set
of subrogation rights that are recognized in court proceedings
or in arbitration. These rights may lie against the persons
causing the damages directly or against the insurers of those
persons. The Company is primarily engaged in making subrogation
recoveries for its clients on automobile physical damage and
premises damage claims.

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P&C Subrogation Recovery Process.The recovery
process has been refined to four major, interrelated steps:
(i) acquisition of claims data on potential subrogation
claims from clients; (ii) investigation of potentially
recoverable subrogation claims; (iii) assertion and
management of potentially recoverable subrogation claims; and
(iv) negotiation and settlement of claims.

The Company dedicates staff with specialized skills to
individual services to optimize recoveries. The workflow
performed by the various recovery personnel is directed and
guided step-by-step by the Companys proprietary and other
software. The Companys systems document activity on the
claim files and provide an interconnected record of
correspondence and notes taken by the recovery personnel with
respect to each file. The Companys recovery personnel
annotate the files on-line, as necessary, to document progress,
developments and status and otherwise maintain the history of
each claim.

Once a file of claims is classified as recoverable, the
Companys recovery personnel, who undergo extensive
training, proceed to assert the recovery rights of the
Companys clients and track the claims history and
development. The employees contact all necessary parties to
inform them of the existence and value of the recovery claim.
These parties generally include the liability insurer for the
responsible party or the responsible party itself when it is
uninsured. Recovery personnel maintain contact with the parties
involved, including the responsible party (or insurance
carrier), until the claim is settled. Settlement may not occur
until several years after the claim was originally paid.

The recovery process culminates in the negotiation and
settlement of claim files. Within the settlement guidelines
established by each client and the Companys standard
operating procedures, recovery personnel close recoverable files
and remove them from backlog by making recoveries or by
rejecting files and terminating recovery efforts. Once a
settlement is made and recorded in the system, receipt of cash
is anticipated and monitored by the responsible employee. Cash
receipts are posted to the credit of the appropriate client.

Claims remain the property of the Companys clients and
litigation is commenced solely at their written direction.
Similarly, clients may terminate litigation or other recovery
efforts at any time for any reason.

Although some subrogation recoveries will be made during the
first year of service, the average time to make a recovery is 18
to 24 months from date of loss, with substantially all
recoveries made within 36 months for automobile coverages.
The recovery process for bodily injury claims and property
claims with complex facts may take up to five to six years from
the date of loss to recover. The timing of recoveries is driven
by the P&C payment cycle of claims (which is the source of
recoveries made by the Company) and circumstances specific to
each claim (e.g., identification of responsible party,
responsiveness of responsible party, cooperation of parties
involved, factual complexity and litigation). The amount of
claims recoveries made by the Company on behalf of a client is
generally less than the amount of backlog generated on behalf of
such client. This happens for a number of reasons, including
(i) the inadequacy of insurance coverage or other available
source of funds to pay the claim; (ii) the absence of
third-party liability; or (iii) the settlement of the claim
for less than full value in accordance with the clients
settlement guidelines and the Companys established
operating policies.



| |         
| | --------
| | Software

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. In the
private health insurance and benefits market, the Company
currently estimates that 40% to 50% of these participants do not
outsource subrogation recoveries. In the public health insurance
and benefits market, i.e., Medicaid and Medicare, the Company
believes that there is virtually no outsourcing of subrogation
recoveries because these programs typically rely on their claims
administration contractors to provide subrogation services as
part of a bundled service contract. In the P&C market, the
Company believes that certain participants are by their nature
less likely to outsource subrogation services. For example, the
Company believes that mutual insurers have organizational and
cultural biases against outsourcing and that larger P&C
insurers have sufficient resources to develop relatively
sophisticated internal departments.

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In June 2002, the Company made its first sale of the Troveris
software to an outside client, and a second sale was made in
December 2003. 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 (such as investigation,
training, etc.) 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.

In addition to being offered for sale as an on-line subrogation
recovery system in an ASP-model, Troveris also constitutes the
systems platform for the Companys recovery operations. All
of those operations are currently conducted on Troveris. The
Company began to migrate its internal healthcare subrogation
operations to a version of Troveris during the fourth quarter of
2001, at which time it anticipated reducing its technology
expense, net of the expense of maintaining the Troveris
application, by at least $600,000 per year. At present,
substantially all of that expense reduction has been captured
and is reflected in the Companys 2003 financial results.

Employees

The Company employs, and facilitates the development of, skilled
knowledge-workers. The Company maintains an in-house training
program, which it believes is attractive to employees and
essential in developing the necessary industry-specific skills.
The Company employed 591 persons as of December 31,
2003 and 666 persons as of December 31, 2002.

The Company requires all employees to enter into confidentiality
and nondisclosure agreements, which generally prohibit them from
divulging confidential information and trade secrets after
employment is terminated. Employees are also required to enter
into non-compete agreements, preventing them from working for a
competitor during the first year after employment is terminated.
In addition, the Companys customers generally agree not to
employ the Companys employees during the clients
contract term plus a specified period.

The Companys employees are not represented by a labor
union or a collective bargaining agreement. The Company regards
its employee relations as good.

Marketing, Sales and Client Service

The Company primarily markets its healthcare recovery services
and healthcare subrogation software to and contracts with
healthcare payors, including HMOs, other types of managed
healthcare plans, indemnity health insurers, self-funded
employee health plans, insured healthcare plans, third-party
administrators, Blue Cross and Blue Shield organizations and
provider organized health plans.

The Company primarily markets its P&C subrogation recovery
service and P&C subrogation software to P&C insurers
that are personal lines automobile carriers or that are
multi-lines carriers which focus on automobile coverage.
Although its focus is on selling full outsource subrogation
recovery services, the Company does provide referral services
and closed claims services, both of which are more limited in
scope and revenue potential than is the full outsourcing product.

The Company employs a staff of sales managers, a marketing
manager and client services managers for its healthcare recovery
services and healthcare subrogation software and a separate
staff of sales managers and client services managers for its
P&C subrogation recovery service and P&C subrogation
software. Sales are made directly through contacts with
prospective clients, trade show presentations and employer
seminars. Additional business is also generated from existing
clients, which have expanded their business by growth or
acquisitions or which have business segments not already under
contract with the Company.

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Due to the nature of its outsourcing businesses, the operating
cycle for some of its products and the industries to which it
markets its products, the sales process is lengthy and involves
demonstrating to prospective clients that the Companys
economies of scale, proprietary processes and value-added
services allow (i) the Company to generate and return to
the clients a greater dollar amount of recoveries than the
clients in-house recovery department and (ii) the
clients to focus greater resources on core business functions.
New customer relationships can also be established through pilot
programs, which have typically lasted 12 to 18 months.

Complementing the technical aspects of the recovery process, the
client support function is primarily responsible for
communications with clients and problem resolution. To
facilitate strong working relationships, individual members of
the client services staff are assigned to specific clients. The
Company believes that its investment in resources to resolve a
wide variety of business issues with clients is an important
factor in obtaining customers and maintaining good business
relationships.

During the year ended December 31, 2003, clients terminated
healthcare recovery services from the Company covering 9.0
million lives; certain of these same clients, however, kept in
place or bought from the Company other healthcare recovery
services with respect to 1.4 million lives. During the
three-year period ended December 31, 2003, clients
terminated healthcare recovery services from the Company
covering 23.9 million lives; these same clients, however,
kept in place or bought from the Company other healthcare
recovery services covering 4.1 million lives. The
terminations occurred due to, among other things, consolidations
of healthcare payors, bankruptcy, the selection of another
vendor, or because the process was taken in-house. See
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations 
Healthcare Recovery Services  Results of
Operations  Key Operating Indicators.

During the year ended December 31, 2003, the Company had
four contract terminations involving three property and casualty
clients. One of the client terminations involved referral
business (i.e., less than full outsourcing) that never produced
significant revenues. A second client terminated its contract
because it took the recovery process in-house. The third client
terminated its two contracts after the Company completed the
projects (which involved analysis of claims that had already
been reviewed by the client).

Client Base

Healthcare Recovery Services. The Company provides
services to healthcare plans that as of December 31, 2003
covered approximately 39.9 million lives. The Companys
clients are national and regional healthcare payors, large
third-party administrators or self-insured corporations.

Major healthcare recovery services clients include the following:

|                                                                  |  |                                                                                      
|----------------------------------------------------------------- |  | -------------------------------------------------------------------------------------
|HealthNet
    Humana Inc.
    Group Health, Inc.
    FIRST HEALTH |  | The Principal Financial Group
    Kaiser Permanente
    Wellpoint Health Network Inc.

The Company currently has one client, Wellpoint Health Network
(Wellpoint), that individually accounts for more
than 10% of its revenue. It also has a former client,
UnitedHealth Group (UHG), that historically
accounted for more than 10% of the Companys revenue. For
the years ended December 31, 2003, 2002 and 2001, UHG
generated 24%, 28% and 27% of the Companys revenue,
respectively, and Wellpoint generated 17%, 14% and 11% of the
Companys revenue, 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 recovery 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

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During 2002, UHG management informed the Company of its
intention to terminate subrogation services with respect to all
but 1.8 million lives of the 9.7 million lives then
subject to the Companys services under a contract with
UHG. UHGs termination of these services resulted from its
decision to bring subrogation recovery services back inside UHG,
where they are being performed by its Ingenix strategic business
unit. The Companys contract with UHG expired in accordance
with its terms on February 1, 2003, except with respect to
the 1.8 million lives. In December 2003, UHG gave notice of
the termination of the remaining business under contract,
effective February 1, 2004. The Company expects to continue
recovering on the backlog as to which UHG terminated the
Companys services, a process that the Company expects will
be completed in 5 to 6 years from the dates of termination.

Property and Casualty Recovery Services.As of
December 31, 2003, the Company provides services to
19 P&C insurers, of which five are clients for full
outsourcing with the remainder being clients for either referral
services, in which the Company supplements the capacity of an
internal recovery unit, or closed claims reviews, in which the
Company recovers subrogation claims missed or ignored by an
internal recovery unit. Three of the Companys P&C
Recovery Services clients account for greater than 69% of this
segments backlog at December 31, 2003.

The Companys P&C Recovery Services revenues are earned
under written contracts with its clients that generally provide
for contingency fees from recoveries. The pricing arrangements
offered by the Company to its clients also include tiered
pricing based on the Companys service levels.

The Company performs its recovery 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.
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. On December 31, 2003 and
2002, the Company had P&C Recovery Services backlog of
$17.9 million and $15.3 million, respectively.

Software. As of December 31, 2003, the Company had
two software clients. One, a Cincinnati-based third party
administrator of healthcare claims for self-funded employers,
became a client in June 2002, and the second, a Blue Cross Blue
Shield organization, became a client in late December 2003. The
Software segment earns software revenues based on an external
clients level of utilization, and from the Healthcare
Recovery Services and P&C Recovery Services segments based
on their use of the Troveris software. Moreover, the Software
segment may also earn commission revenue from the Healthcare
Recovery Services and the P&C Recovery Services segments on
any revenue that the Company derives from healthcare subrogation
services or P&C subrogation services that are delivered by
such segments to an external client through Troveris.

Competition

Healthcare Recovery Services. The Company competes
primarily with the internal recovery departments of potential
customers and other outsource healthcare recovery service
vendors. To the Companys knowledge, in addition to the
Company there are four smaller, but significant, independent
providers of healthcare subrogation recovery services, four
different vendors that provide competitive overpayment recovery
outsourcing services, and three national companies that provide
provider bill auditing services.

Property and Casualty Recovery Services. 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 by law firms that specialize in a
low volume of legally complex subrogation claims. The Company
has identified five competitors that attempt to serve a

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With respect to both its healthcare recovery services and its
P&C recovery services, the Company believes that there are
barriers to entry in the bulk of its market, including process
expertise, capital requirements necessitated by the unusually
long revenue cycle in the recovery industry, assembling and
training a qualified and productive employee base possessing
appropriate industry expertise, and an information processing
system designed to aid investigators and examiners engaged in
the recovery process. However, there are participants in the
healthcare, insurance, transaction processing and software
development industries that possess sufficient capital, and
managerial and technical expertise to develop competitive
services.

Software. The Company is not aware of any competition in
subrogation software in an ASP model for the healthcare payor
industry, and it has identified only one 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.

With respect to its software segment, the Company believes that
there are barriers to entry in its market, including process
expertise. However, there are participants in the healthcare,
insurance, transaction processing and software development
industries that possess sufficient capital and managerial and
technical expertise to develop competitive software.

Proprietary Information Management Systems

General. The Companys computer systems consist of
inter-related proprietary software programs that function as
automated data and process management systems. The Company holds
a copyright on certain of its software and has applied to the
United States Patent Office for patents on certain inventions
contained in the Troveris software.

Quality and Management Controls. The computer systems
control, measure and generate reports on the recovery processes.
From data recorded in these systems, a series of financial
reports are generated for clients that allow them to monitor the
Companys success in making recoveries on their behalf. The
data used for financial reports are also used to produce a wide
array of accounting and management information used by the
Company to operate its business. The Company employs a variety
of quality control techniques to ensure consistently
high-quality service.

Research and Development

During the years ended December 31, 2003 and 2002, the
Company incurred no research and development expense. The
Company incurred approximately $537,000 in research and
development expense during the year ended December 31, 2001
in connection with the development of the Troveris software
which was placed in service during 2002.

Legal and Regulatory Environment

The healthcare industry is subject to numerous laws and
regulations which may affect the Companys business. In
addition to laws and regulations affecting healthcare and
insurance, changes in the federal fair debt collection laws and
laws governing the privacy of personal health information may
also adversely affect the Companys business.

General. From time to time, legislation is introduced in
Congress and various state legislatures which would materially,
and potentially adversely, affect the Companys business.
Moreover, courts (particularly the United States Supreme Court,
the federal appellate courts and the state supreme and appellate
courts) have the power to create and interpret laws in ways that
may also materially and adversely affect the Companys
business. The most significant legislation, laws and regulations
may, for clarity, be grouped into three categories:
(i) legislation that would substantially limit the ability
of healthcare insurers to recover from third-parties
accident-related medical benefits incurred by injured insureds
(Health Insurance Primacy Laws);

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| |                              
| | -----------------------------
| | Health Insurance Primacy Laws

Auto Choice Reform Act. In May 2001, Congress proposed,
but failed to enact, legislation known as the Auto Choice Reform
Act of 2001 (the Proposed Act). Similar bills were
introduced but not enacted in each of the two previous
Congresses. Under the Proposed Act, in those states not opting
out of its provisions, individual drivers would have been able
to choose to be covered by an auto insurance system in which
healthcare insurers, with some exceptions, might have been
unable to recover for healthcare costs incurred by those injured
in automobile accidents. Consequently, even if the
insureds injuries were caused by the negligence of another
driver, the healthcare insurer might not have had any rights of
recovery against the negligent party or that partys
liability insurer. Revenue generated from recoveries against
automobile liability insurers historically has represented
approximately 65% of the Companys revenues. Should similar
legislation be enacted, it could have a material adverse effect
on the Companys business, results of operations and
financial condition.

Proponents of the Proposed Act asserted that (i) the costs
of operating a motor vehicle are excessive due to legal and
administrative costs associated with the processing of claims
under the fault-based liability system; and (ii) the costly
fault-based liability insurance system often fails to provide
compensation commensurate with loss and takes too long to pay
benefits. Even if the Proposed Act is not introduced in Congress
again in the future, these policy reasons may result in future
legislation designed to significantly alter the fault-based
liability system used in most states, eliminate recovery rights
of healthcare insurers and materially adversely affect the
Companys business.

Certain No Fault Insurance Systems. Certain states have
adopted versions of automobile no fault insurance
systems in which the injured partys health insurance
carrier or provider is primarily responsible for healthcare
related expenses (and not the responsible party and his or her
insurer or the injured insureds automobile liability
insurer). In 1996, California voters rejected a no-fault
automobile insurance measure, Proposition 200, which would have
required drivers with bodily injuries to be compensated by their
healthcare insurers. Although Proposition 200 was rejected by
the voters, there can be no assurance that similar measures will
not again be presented in a ballot initiative or as legislation
in California or elsewhere in the future. Growth in the number
of states adopting similar systems could significantly reduce
the amounts otherwise recoverable by the Company in connection
with automobile injuries in such states.



| |                     
| | --------------------
| | Confidentiality Laws

Confidentiality Provisions of the Health Insurance
Portability and Accountability Act of 1996 and Related
Regulations. The Companys activities involve the
receipt and use of confidential health information from or on
behalf of its clients. In December 2000, the Secretary (the
Secretary) of Health and Human Services
(HHS) promulgated the Standards for Privacy of
Individually Identifiable Health Information, 45 C.F.R.
Parts 160 and 164 (as modified, the Privacy
Rule), which deals with the use and disclosure of health
information and implements certain requirements of the
Administrative Simplification subtitle of the Health Insurance
Portability and Accountability Act of 1996 (HIPAA).
The Privacy Rule became effective on April 14, 2001 and
health plans, health care clearinghouses, and certain health
care providers covered by the Privacy Rule (Covered
Entities) generally were required to comply by
April 14, 2003. The Privacy Rule prescribes the manner in
which Covered Entities are permitted or required to use and
disclose individually identifiable health information subject to
the Privacy Rules requirements, known as protected
health information. The Privacy Rule also requires Covered
Entities to implement certain administrative
requirements, such as establishing relevant policies and
procedures, designating a privacy official responsible for the
development and implementation of the policies and procedures,
and training affected members of the workforce regarding the
policies and procedures. The Privacy Rule establishes a complex
regulatory framework on a variety of subjects, including, but
not limited to, (a) disclosures and uses of protected
health information, (b) individuals rights to access,
amendment, and accounting regarding their protected health

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The Privacy Rule affects other entities that are not necessarily
Covered Entities under the Privacy Rule, but which perform
certain functions or activities on behalf of Covered Entities.
Entities performing certain functions or activities on behalf of
a Covered Entity are treated as business associates
of a Covered Entity under the Privacy Rule. The Companys
activities make it a business associate of customers that are
Covered Entities, such as health plans. The Privacy Rule
requires the Covered Entity and its business associates to enter
into contracts that meet certain requirements. Therefore,
although a business associate to a Covered Entity is not
directly subject to the Privacy Rule, it will be subject to
certain similar requirements imposed through its business
associate contracts. Significantly, however, the Privacy Rule
does not require business associate contracts to obligate
business associates to implement certain organizational
requirements the Privacy Rule imposes upon Covered Entities,
such as appointing a privacy officer or establishing and
distributing a notice of privacy practices. The business
associate provisions of the Privacy Rule do require a Covered
Entity that becomes aware of a pattern of activity or practice
of a business associate that constitutes a material violation of
the business associates obligations under the contract to
take reasonable steps to end the violation and, if such steps
are not successful, terminate the contract with the business
associate, if feasible.

In August 2000, HHS issued pursuant to HIPAA, a final rule
establishing transaction standards and code sets for the
electronic transmission of health information, 45 C.F.R.
Part 162 (the Transaction Standards). The
Transaction Standards adopt uniform standards that must be used
if one health care provider or health plan conducts certain
electronic transactions with another health care provider or
health plan. Moreover, the Transaction Standards establish
certain code sets to be used in connection with the standard
transactions. Health plans and other entities subject to the
Transaction Standards were generally required to comply by
October 16, 2003. The Company currently does not engage in
any transactions covered by the Transaction Standards. However,
additional transactions, possibly including transactions engaged
in by the Company, will be covered by the Transaction Standards
in the future.

In addition to the Privacy Rule and the Transactions Standard,
in February 2003 HHS published, pursuant to HIPAA, a final rule
governing the security of health information maintained or
transmitted electronically by health plans and certain
clearinghouses and providers (the Security
Standards). The Security Standards impose extensive
additional administrative, physical, technological, and
organizational requirements on Covered Entities and their
business associates. As noted above, certain of the
Companys activities make it a business associate of the
Companys clients; therefore the Company will have some
contractual obligations related to the Security Standards. The
Security Standards have a compliance date of April 21, 2005.

HIPAA, the Privacy Rule, the Transactions Standard and the
Security Standard (collectively, the Rules) could
impair the Companys subrogation recovery practices by
creating administrative burdens (for example, by requiring
business associates of Covered Entities to amend health
information in certain circumstances or to restrict subsequent
uses of protected health information) or liability risks that
lead health plans to voluntarily restrict their subrogation
recovery practices. The provisions of the Rules or of future
federal legislation and regulations could impair or prevent the
acquisition and use by the Company of claims and insurance
information necessary to process recovery claims on behalf of
its clients. However, the Company believes that it will be able
to comply with the Rules on a timely basis and without material
adverse effect.

In addition to the federal protection of health information,
state laws governing privacy of medical or insurance records and
related matters may significantly affect the Companys
business. Most states have enacted health care information
confidentiality laws that limit the disclosure of confidential
medical information. The Rules do not preempt state laws
regarding health information privacy that are more restrictive
than the Rules. The costs and efforts associated with compliance
with the various state laws could increase in the future if
states begin to enact additional and more comprehensive privacy
legislation and may have a material adverse effect on the
Company.

14



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##### Table of Contents





| |                             
| | ----------------------------
| | Other Federal and State Laws

Changes in a variety of laws could also affect the
Companys business. One such area is insurance law, which
comprises a complex network of state and federal laws, such as
the federal Employee Retirement Income Security Act of 1974
(ERISA), the regulations and orders promulgated under those
laws, and the pertinent case law created by state and federal
courts. Similarly, federal or state laws that would bar or
impair healthcare subrogation or an injured partys ability
to collect insured damages (that is, an injured person would be
prevented from recovering from the wrongdoer damages for
accident-related medical benefits covered by health insurance)
could similarly adversely affect the Companys business.
Existing debt collection laws also may be amended or interpreted
in a manner that could adversely affect the Companys
business. Additionally, although the Company does not believe
that it engages in the unauthorized practice of law, changes in
the law or a judicial or administrative decision defining some
of the Companys activities as the practice of law, could
have a material adverse effect on the Companys business.



| |                        
| | -----------------------
| | Certain Legal Doctrines

With respect to recoverable claims, the rights of healthcare
subrogation and reimbursement may be limited in some cases by
three principles of general application. The first of these is
the made whole doctrine, which subordinates the
healthcare providers ability to recover to that of the
injured party when the settlement damage award received by the
injured party is inadequate to cover the injured partys
damages. The second is the common fund doctrine,
which permits plaintiffs attorneys to deduct their fees
for the claim based on the entire amount covered by a damage
award and may, in some cases, proportionally diminish the amount
recoverable by the Company on behalf of the healthcare payor out
of that damage award. Finally, federal courts have in some
venues, most notably the Ninth Circuit which covers California
and several other western states, begun to apply a doctrine
under ERISA that prevents or hinders health plans (and their
recovery agents) from bringing healthcare reimbursement actions
in federal court.

Where You Can Find More Information

The Company makes its annual report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K and
all amendments and exhibits to these reports filed pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act
of 1934, as amended (the Exchange Act), available
(free of charge) on or through its Internet website located at
http://www.troversolutions.com, as soon as reasonably
practicable after they are filed with or furnished to the SEC.
The address of the Companys website is provided solely for
the readers convenience and is not intended to be an
active link.




Item 2.     Properties

As of December 31, 2003, the Company leased property at the
following four locations: (i) approximately 105,718 square
feet of space for its executive offices and main operations in
Louisville, Kentucky, under a lease agreement and amendment
expiring in 2009; (ii) approximately 10,206 square feet at
a regional operating office in Pittsburgh, Pennsylvania, under a
lease agreement expiring in 2006; (iii) approximately 8,125
square feet at its Encino, California location under a lease
agreement expiring in 2004; and (iv) approximately 20,500
square feet at its New Berlin, Wisconsin location under a 5-year
term expiring in 2006. The Company is currently in negotiations
to extend the lease for the Encino, California office for a
five-year term expiring in 2009, with substantially the same
terms as the current lease.




Item 3.     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. Consequently, since its founding in 1988 the
Company has been involved with many litigation matters related
to its subrogation business, sometimes as a defendant and
sometimes through a defendant client. The 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

15



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##### Table of Contents





To date, however, the Company has encountered eight noteworthy
instances in addition to the pending 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 these five 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 of those five lawsuits, pled as class actions and naming
the Company as a defendant, were filed in federal court and
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.

The remaining three lawsuits did not name the Company as a
defendant. These three lawsuits did, however, involve the
Companys clients and implicate important Company 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
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
context for these kinds 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.

16



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##### Table of Contents



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



| |                                                                          
| | -------------------------------------------------------------------------
| | 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 the plaintiff asserts
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. After the defendants filed a motion for summary
judgment in January 2002, the plaintiff moved the court to delay
consideration of the motion until the plaintiff could complete
additional discovery. The plaintiffs motion to delay
consideration was granted. On October 25, 2002, the
plaintiff filed an amended petition naming one additional
plaintiff as a purported class representative. The amended
petition did not add any new claims. The defendants filed a
motion for summary judgment on January 24, 2003, and the
plaintiffs filed a cross motion for summary judgment. On
February 25, 2003, a state court judge denied the
defendants motion for summary judgment that the defendants
were entitled to enforce the terms of Prudentials
policies. The same judge granted the plaintiffs partial
motion for summary judgment to the effect that Prudential could
not recover more than its costs. That ruling is not final nor
yet appealable. The plaintiffs have not yet moved the court to
certify the case as a class action.



| |                                                                     
| | --------------------------------------------------------------------
| | 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, the defendant Companion Healthcare Corp.
(CHC) filed an Answer and Counterclaim and the
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
the 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. The
plaintiffs, on behalf of the purported class, demand
compensatory damages, punitive damages, and treble damages,
disgorgement of unjust profits, costs,

17



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| |                                  
| | ---------------------------------
| | 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, the
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 the 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. The 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. The 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,
without prejudice. The plaintiff filed an appeal to the United
States Fifth Circuit Court of Appeals. In November 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. On April 29, 2003, the Company
filed a Petition for Writ of Certiorari asking the
U.S. Supreme Court to accept an appeal of the Court of
Appeals ruling. The Supreme Court denied the Petition on
June 9, 2003.

After the case was remanded to the trial court, the Company
filed a second Motion for Summary Judgment. On May 13,
2003, the Court entered an Order granting the Companys
Motion for Summary Judgment, dismissing with prejudice the
Plaintiffs claims under the FDCPA and dismissing without
prejudice the Plaintiffs remaining state law claims. On
May 27, 2003, the plaintiff filed a Notice of Appeal to the
United States Fifth Circuit Court of Appeals, which heard oral
argument of the appeal on December 3, 2003. The Court has
not yet ruled on the appeal.

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. There were no
further proceedings in the case until March 2003 when the
Company filed a motion to stay any further proceedings in that
case due to the related case pending in federal court. On
April 25, 2003, the state court entered an order granting
the Companys motion to stay the lawsuit. Thereafter, the
Company removed the case from state court to Federal court on
August 5, 2003. On September 4, 2003,

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| |                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------
| | Bruun et al. v. Prudential Health Care Plan, Prudential
    Insurance Company of America, Aetna, Inc. and Trover
    Solutions

On October 30, 2002, plaintiffs counsel in the
Cajasand Frankscases filed a class action
lawsuit in the United States District Court for the District of
New Jersey on behalf of two Texas residents against the Company,
Prudential Insurance Company, one of the Companys clients,
PruCare HMO, a subsidiary of Prudential Insurance Company, and
Aetna, a company which had acquired the business of another of
the Companys clients. The complaint was served on the
Company on February 27, 2003.

In the complaint, plaintiffs Kimberly Bruun and Ashley Emanis,
on behalf of themselves and similarly situated persons, asserted
claims on behalf of a putative nationwide class of persons who
were members of PruCare HMO health plans governed by ERISA from
whom the Company, under its contract with the client, recovered
reimbursement. The complaint alleged that reimbursement
recoveries made by PruCare HMO and the Company violate the terms
of the standard PruCare HMO plan documents, and that
reimbursement recoveries violate the Conformity with Law
provision in the standard plan documents because subrogation and
reimbursement are prohibited under the federal HMO Act. The
complaint further alleged that the defendants subrogation
and reimbursement recoveries resulted in a double recovery to
PruCare HMO because PruCare HMO did not account for subrogation
and reimbursement recoveries as offsets to expenses when setting
premium rates. The complaint further alleged that the defendants
improperly recovered in subrogation or reimbursement for
services provided by capitated providers, or that in the
alternative, the defendants improperly recovered more for
capitated services than was paid for the services, or
alternatively, that the defendants improperly collected amounts
that exceeded the reasonable cash value of capitated services.
The plaintiffs allege that PruCare HMO, Prudential, Aetna and
the Company are fiduciaries and that they each have breached
their fiduciary duty to the plaintiffs. Alternatively, the
plaintiffs allege that if Aetna, Prudential and the Company are
not fiduciaries, that they knowingly participated in PruCare
HMOs breach of fiduciary duty.

The plaintiffs, on behalf of the class, demand enforcement of
the plan documents under certain sections of ERISA. The
plaintiffs also demand restitution and disgorgement of sums
recovered by defendants and the establishment of a constructive
trust. The plaintiffs also demand an accounting of PruCare
HMOs and Aetnas rate documents, the subrogation and
reimbursement claims for capitated services, and/or the actual
costs paid by PruCare HMO and Aetna for the capitated services.

On April 16, 2003, the defendants filed motions seeking to
dismiss the lawsuit or to change the venue of the lawsuit to a
federal court in Texas. On October 16, 2003, the court
entered an order granting the defendants motions to
dismiss and dismissing all of the plaintiffs claims. On
November 13, 2003, the plaintiffs filed a Notice of Appeal
to the United States Third Circuit Court of Appeals. The
plaintiffs filed their appellate brief on February 23,
2004. The Company has not yet filed briefs or argued the appeal.



| |                                                                                  
| | ---------------------------------------------------------------------------------
| | Godair v. American Home Assurance Company, Trover Solutions,
    and HMO Partners

On March 14, 2003, Lawrence Godair, the plaintiff in a
putative class action against a motor vehicle insurer, amended
his complaint to add the Company, and a client of the company,
HMO Partners, as defendants in Lawrence Godair v. American
Home Assurance Company, Trover Solutions, Inc. and HMO Partners,
Inc.,No. 4:02 CV 00407 SMR, United States District
Court for the Eastern District of Arkansas, Western Division. In
the amended complaint (the Amended Complaint), the
plaintiff makes allegations on behalf of himself and a purported
class of others similarly situated. The complaint asserts that
the Company, as subrogation agent for HMO Partners, unlawfully
demanded payment of a subrogation claim against proceeds of a
medical payments insurance policy issued to the plaintiff by
American Home. The Amended Complaint also alleges that the
Company was unjustly enriched because the plaintiff was not
fully compensated (made whole) for his injuries in
violation of the Arkansas no-fault motor vehicle insurance
statute and because the payment constituted a double recovery to
the Company and to HMO Partners, in

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The Company was served with the Amended Complaint on
March 18, 2003 and filed an Answer denying the
plaintiffs claims on May 5, 2003. The Company intends
to vigorously defend itself against these allegations. The
Company and the plaintiff are currently engaged in the discovery
process.

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

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

Litigation Terminated in the Fourth Quarter of 2003



| |                                                                                         
| | ----------------------------------------------------------------------------------------
| | 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 made

20



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##### Table of Contents








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

None.




Supplementary Item. Certain Risk Factors

See Safe Harbor Compliance Statement for Forward-Looking
Statements, included as Exhibit 99.1 to this
Form 10-K and incorporated herein by reference.




PART II






|        |                                                                              
|------- | -----------------------------------------------------------------------------
|Item 5. | Market for the Registrants Common Equity and Related
    Stockholder Matters

The Companys Common Stock is traded on The Nasdaq National
Market under the symbol TROV. The following tables
set forth the high and low closing prices for the Companys
Common Stock for the periods indicated, as reflected in The
Nasdaq National Market.

|                   |  |      |      |     |  |   |      | 
|------------------ |  | ---- | ---- | --- |  | - | ---- | 
|Quarter Ended:     |  | High |      | Low
|                   |  |      |      |    
|March 31, 2003     |  | $    | 5.45 |     |  | $ | 5.00 | 
|                  
|                  
|                  
|                  
|June 30, 2003      |  |      | 6.10 |     |  |   | 5.45 | 
|                  
|                  
|                  
|                  
|September 30, 2003 |  |      | 7.15 |     |  |   | 5.53 | 
|                  
|                  
|                  
|                  
|December 31, 2003  |  |      | 7.43 |     |  |   | 6.33 | 

|                   |  |      |      |     |  |   |      | 
|------------------ |  | ---- | ---- | --- |  | - | ---- | 
|Quarter Ended:     |  | High |      | Low
|                   |  |      |      |    
|March 31, 2002     |  | $    | 6.28 |     |  | $ | 4.70 | 
|                  
|                  
|                  
|                  
|June 30, 2002      |  |      | 6.29 |     |  |   | 4.17 | 
|                  
|                  
|                  
|                  
|September 30, 2002 |  |      | 6.11 |     |  |   | 3.80 | 
|                  
|                  
|                  
|                  
|December 31, 2002  |  |      | 5.50 |     |  |   | 4.13 | 

On March 15, 2004, there were approximately 48 holders of
record of the Companys Common Stock.

The Company has paid no cash dividends since its initial public
offering in May 1997. Any future determination to pay cash
dividends will be at the discretion of the Board of Directors
(the Board) and will be dependent upon the
Companys financial condition, results of operations,
credit agreements, capital requirements and such other factors
as the Board deems relevant. The Companys current credit
facility limits its ability to pay dividends on its Common
Stock. See Item 1. Business  Recent
Developments and Item 7. Managements
Discussion and Analysis of Financial Condition and Results of
Operations  Liquidity and Capital Resources.

21



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|        |                        
|------- | -----------------------
|Item 6. | Selected Financial Data

The tables below summarize selected recent financial information
for the Company. For further information, refer to the
Companys financial statements and notes thereto presented
under Part II, Item 8 of the Form 10-K.

Statements of Income Data

(Dollars in thousands, except per share amounts)


|                                    |                            |                          |        |        |  |      |        |        |  |      |        |        |  |   |        |        |  |   |        |        | 
|----------------------------------- | -------------------------- | ------------------------ | ------ | ------ |  | ---- | ------ | ------ |  | ---- | ------ | ------ |  | - | ------ | ------ |  | - | ------ | ------ | 
|                                    |                            |                         
|                                    |                            | Years Ended December 31,
|                                    |                            |                         
|                                    |                            | 2003                     |        | 2002   |  | 2001 |        | 2000   |  | 1999
|                                    |                            |                          |        |        |  |      |        |        |  |     
|Claims revenues                     |                            | $                        | 65,748 |        |  | $    | 69,478 |        |  | $    | 64,147 |        |  | $ | 63,627 |        |  | $ | 61,409 |       
|                                   
|                                   
|                                   
|                                   
|Cost of revenues                    |                            |                          | 32,535 |        |  |      | 33,492 |        |  |      | 31,589 |        |  |   | 30,432 |        |  |   | 31,451 |       
|                                    |                            |                          |        |        |  |      |        |        |  |      |        |        |  |   |        |        |  |   |        |       
|                                    | Gross profit               |                          |        | 33,213 |  |      |        | 35,986 |  |      |        | 32,558 |  |   |        | 33,195 |  |   |        | 29,958 | 
|                                   
|                                   
|                                   
|                                   
|Support expenses                    |                            |                          | 19,926 |        |  |      | 19,924 |        |  |      | 17,499 |        |  |   | 17,151 |        |  |   | 16,321 |       
|                                   
|                                   
|                                   
|                                   
|Depreciation and amortization       |                            |                          | 3,368  |        |  |      | 4,760  |        |  |      | 6,701  |        |  |   | 6,372  |        |  |   | 4,954  |       
|                                   
|                                   
|                                   
|                                   
|Research and development            |                            |                          |       |        |  |      |       |        |  |      | 537    |        |  |   | 366    |        |  |   |       |       
|                                    |                            |                          |        |        |  |      |        |        |  |      |        |        |  |   |        |        |  |   |        |       
|                                    | Operating income           |                          |        | 9,919  |  |      |        | 11,302 |  |      |        | 7,821  |  |   |        | 9,306  |  |   |        | 8,683  | 
|                                   
|                                   
|                                   
|                                   
|Interest (expense) income, net      |                            |                          | (237   | )      |  |      | (232   | )      |  |      | (118   | )      |  |   | (237   | )      |  |   | 144    |       
|                                   
|                                   
|                                   
|                                   
|Other  Loss on disposal of assets  |                            |                          |       |        |  |      |       |        |  |      | (1,010 | )      |  |   |       |        |  |   |       |       
|                                   
|                                   
|                                   
|                                   
|Other  Litigation settlement       |                            |                          |       |        |  |      |       |        |  |      |       |        |  |   | (3,000 | )      |  |   |       |       
|                                    |                            |                          |        |        |  |      |        |        |  |      |        |        |  |   |        |        |  |   |        |       
|                                    | Income before income taxes |                          |        | 9,682  |  |      |        | 11,070 |  |      |        | 6,693  |  |   |        | 6,069  |  |   |        | 8,827  | 
|                                   
|                                   
|                                   
|                                   
|Provision for income taxes          |                            |                          | 3,873  |        |  |      | 4,240  |        |  |      | 2,097  |        |  |   | 2,519  |        |  |   | 3,665  |       
|                                    |                            |                          |        |        |  |      |        |        |  |      |        |        |  |   |        |        |  |   |        |       
|                                    | Net income                 |                          | $      | 5,809  |  |      | $      | 6,830  |  |      | $      | 4,596  |  |   | $      | 3,550  |  |   | $      | 5,162  | 
|                                    |                            |                          |        |        |  |      |        |        |  |      |        |        |  |   |        |        |  |   |        |       
|Earnings per common share (basic)   |                            | $                        | 0.69   |        |  | $    | 0.74   |        |  | $    | 0.47   |        |  | $ | 0.33   |        |  | $ | 0.46   |       
|                                    |                            |                          |        |        |  |      |        |        |  |      |        |        |  |   |        |        |  |   |        |       
|Earnings per common share (diluted) |                            | $                        | 0.66   |        |  | $    | 0.72   |        |  | $    | 0.46   |        |  | $ | 0.33   |        |  | $ | 0.46   |       
|                                    |                            |                          |        |        |  |      |        |        |  |      |        |        |  |   |        |        |  |   |        |       

Statements of Income as a Percentage of Claims Revenues

|                                   |  |                          |        |      |  |      |        |   |  |  |        |  
|---------------------------------- |  | ------------------------ | ------ | ---- |  | ---- | ------ | - |  |  | ------ | -
|                                   |  |                         
|                                   |  | Years Ended December 31,
|                                   |  |                         
|                                   |  | 2003                     |        | 2002 |  | 2001
|                                   |  |                          |        |      |  |     
|Claims revenues                    |  |                          | 100.0% |      |  |      | 100.0% |   |  |  | 100.0% |  
|                                  
|                                  
|                                  
|                                  
|Cost of revenues                   |  |                          | 49.5   |      |  |      | 48.2   |   |  |  | 49.2   |  
|                                  
|                                  
|                                  
|                                  
|Support expenses                   |  |                          | 30.3   |      |  |      | 28.7   |   |  |  | 27.3   |  
|                                  
|                                  
|                                  
|                                  
|Depreciation and amortization      |  |                          | 5.1    |      |  |      | 6.9    |   |  |  | 10.4   |  
|                                  
|                                  
|                                  
|                                  
|Research and development           |  |                          | 0.0    |      |  |      | 0.0    |   |  |  | 0.8    |  
|                                  
|                                  
|                                  
|                                  
|Operating income                   |  |                          | 15.1   |      |  |      | 16.3   |   |  |  | 12.2   |  
|                                  
|                                  
|                                  
|                                  
|Interest (expense) income, net     |  |                          | (0.4   | )    |  |      | (0.3   | ) |  |  | (0.2   | )
|                                  
|                                  
|                                  
|                                  
|Other  Loss on disposal of assets |  |                          | 0.0    |      |  |      | 0.0    |   |  |  | 1.6    |  
|                                  
|                                  
|                                  
|                                  
|Income before income taxes         |  |                          | 14.7   |      |  |      | 15.9   |   |  |  | 10.4   |  
|                                  
|                                  
|                                  
|                                  
|Net income                         |  |                          | 8.8    |      |  |      | 9.8    |   |  |  | 7.2    |  

Balance Sheet Data

(Dollars in thousands)


|                          |  |              |        |      |  |      |        |      |  |      |        |  |  |   |        |  |  |   |        | 
|------------------------- |  | ------------ | ------ | ---- |  | ---- | ------ | ---- |  | ---- | ------ |  |  | - | ------ |  |  | - | ------ | 
|                          |  |             
|                          |  | December 31,
|                          |  |             
|                          |  | 2003         |        | 2002 |  | 2001 |        | 2000 |  | 1999
|                          |  |              |        |      |  |      |        |      |  |     
|Cash and cash equivalents |  | $            | 11,174 |      |  | $    | 2,269  |      |  | $    | 2,547  |  |  | $ | 1,297  |  |  | $ | 1,467  | 
|                         
|                         
|                         
|                         
|Working capital           |  |              | 12,954 |      |  |      | 8,768  |      |  |      | 10,427 |  |  |   | 7,798  |  |  |   | 7,865  | 
|                         
|                         
|                         
|                         
|Total assets              |  |              | 78,496 |      |  |      | 73,573 |      |  |      | 74,463 |  |  |   | 79,445 |  |  |   | 82,034 | 
|                         
|                         
|                         
|                         
|Long-term borrowings      |  |              |       |      |  |      | 4,000  |      |  |      | 8,000  |  |  |   | 14,000 |  |  |   | 11,000 | 
|                         
|                         
|                         
|                         
|Stockholders equity      |  |              | 48,648 |      |  |      | 43,449 |      |  |      | 42,766 |  |  |   | 38,162 |  |  |   | 40,723 | 

22



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|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis of Financial
    Condition and Results of Operations

Overview of Company

The Company believes, based on its experience and assessment of
its market, that it is a leading independent provider of
outsourcing of subrogation and certain other medical claims
recovery and cost containment services to the U.S. private
healthcare payor industry and of outsourcing of subrogation
recovery services to the U.S. property and casualty
insurance industry. 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
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), (2) the recovery of overpayments
attributable to duplicate payments, failures to coordinate
benefits and similar errors in payment
(overpayments), and (3) the auditing of
physician evaluation and management claims for consistency with
medical records, in accordance with federal guidelines (MD
audit). 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 Inc. and The Principal Financial Group.
The Company had 39.9 million and 41.6 million lives
under contract from its clientele at December 31, 2003 and
2002, respectively.

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

Recent Developments

On February 20, 2004, the Company announced that it had
entered into a definitive agreement to be acquired in an
all-cash transaction in which TSI Acquisition Co., Inc., a
wholly-owned subsidiary of TSI Holding Co., Inc., will be
merged into the Company. TSI Holding Co., Inc. is an
affiliate of Tailwind Capital Partners LLC (Tailwind), which
manages Thomas Weisel Capital Partners, L.P., a private equity
fund. As a result of the merger (the Proposed
Transaction), every stockholder of the Company will
receive $7.00 per share in cash, except that certain members of
management will obtain new stock option grants by
TSI Holding Co., Inc. (which will be the parent corporation
of the surviving entity), may exchange unexercised in the
money stock options of the Company for stock options of
TSI Holding Co., Inc., and may purchase shares of common
stock of TSI Holding Co., Inc. at $7.00 per share.
Immediately following the Proposed Transaction, TSI Holding Co.,
Inc. will be owned by Tailwind, certain members of management of
the Company, and certain co-investors.

If completed, the Proposed Transaction will constitute a going
private transaction and will result in the Company no longer
being publicly traded and no longer filing annual, quarterly and
current reports with the Securities and Exchange Commission
(SEC). The Proposed Transaction must be approved by
the Companys stockholders at a special meeting of the
stockholders, which the Company expects will occur in the second
quarter of 2004. The Proposed Transaction is also subject to
customary closing conditions. The obligation of Tailwind to
proceed under the definitive agreement expires if the Company is
unable to close the Proposed Transaction by July 15, 2004.
More information on the Proposed Transaction is included in the
proxy statement that the Company will mail to its stockholders
in connection with the special meeting of the stockholders at
which the Proposed Transaction will be voted on.

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##### Table of Contents



Critical Accounting Policies

This discussion and analysis of financial condition and results
of operations is based upon the Companys financial
statements, which have been prepared in accordance with
accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires
the use of estimates and judgments that affect the reported
amounts and related disclosures of commitments and
contingencies. The Company relies on historical experience,
established fact-gathering procedures, and various assumptions
that the Company believes to be reasonable under the
circumstances to make judgments about the carrying values of
assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates.

The Company believes that the following critical accounting
policies affect the more significant judgments and estimates
used in the preparation of the Companys financial
statements.

Revenue Recognition

Subrogation revenues are generally derived from contingent fee
arrangements based on the recoveries effected by the Company on
behalf of its clients. Revenue is generally recognized when a
fee is earned based on the settlement of a case. A case is
deemed settled when the Company can confirm that the parties
agree on all material terms associated with the settlement.

In December 2003, the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 104, Revenue
Recognition (SAB 104) which superseded Staff
Accounting Bulletin No. 101, Revenue Recognition in
Financial Statements (SAB 101). SAB 104s
primary purpose was to rescind accounting guidance contained in
SAB 101 related to multiple element revenue arrangements
which was superceded as a result of the issuance of
EITF 00-21, Accounting for Revenue Arrangements with
Multiple Deliverables. EITF 00-21 was effective for
revenue arrangements entered into in fiscal periods beginning
after June 15, 2003. The adoption of EITF 00-21 did
not have a significant impact on the Companys financial
statements. The Company was previously following the
requirements provided under SAB 104 and, accordingly, the
implementation of this pronouncement had no impact on the
Companys financial position or results of operations as
reported.

Accounts Receivable and Collectibility

Approximately $4.1 million and $4.4 million of the
Companys accounts receivable balance of $7.0 and
$9.4 million at December 31, 2003 and 2002,
respectively, is attributable to subrogation services. The
subrogation accounts receivable represents the Companys
fees for cases in which the parties have reached settlements
(including settlements of the subrogation claims of the
Companys clients), but the Company has not yet received
the cash from the settlement of the subrogation claim. The
Company withholds its fee from the gross recovery proceeds of
the subrogation claims that it collects on behalf of its
clients. An allowance for doubtful accounts is maintained for
the estimated loss from settlements that are later broken or
significantly delayed, based on the Companys historical
experience. The accounts receivable balance that at
December 31, 2003 and 2002 was attributable to subrogation
claims represented approximately 3,200 settled cases for
approximately 130 clients and approximately
4,000 settled cases for approximately 140 clients,
respectively, each one subject to its own settlement agreement
with its own settling parties. If the receipt of cash from a
significant number of the settled cases comprising the
subrogation accounts receivable balance were significantly
delayed by third parties to those settled cases (because of
broken settlement agreements, for example), additional
allowances may be required.

Approximately $2.9 million and $4.4 million of the
Companys accounts receivable balance of $7.0 and
$9.4 million at December 31, 2003 and 2002,
respectively, is attributable to provider bill audit services.
The provider bill audit accounts receivable represents the
amounts invoiced by the Company to its clients for its fee for
completed provider audits. For each completed audit, prior to
invoicing, the Company obtains a sign-off

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##### Table of Contents





Capitalization of Software Costs

The Company capitalizes direct costs incurred during the
application development and implementation stages for
developing, purchasing or otherwise acquiring software for
internal use. These software costs are included in property and
equipment on the balance sheet and are amortized over the
estimated useful life of the software, generally three to five
years. All costs incurred during the preliminary project stage
are expensed as incurred.

All costs incurred to establish the technological feasibility of
software products to be sold to others are expensed as research
and development. Once technological feasibility has been
established, all software production costs are capitalized.
Capitalized costs are amortized based on current and future
revenue for each product with an annual minimum equal to the
straight-line amortization over the remaining estimated economic
life of the product.

Goodwill and Long-Lived Assets

At December 31, 2003 and 2002, goodwill and other
long-lived assets represented 49% and 54%, respectively, of the
Companys total assets and 79% and 91%, respectively, of
the Companys total stockholders equity.

Goodwill must be tested at least annually for impairment at a
level of reporting referred to as the reporting unit and more
frequently if adverse events or changes in circumstances
indicate that the asset may be impaired. The Companys
reporting units are generally consistent with the operating
segments underlying the segments in Note 15 to Item 8.
Financial Statements and Supplementary Data. All of
the Companys goodwill relates to the Healthcare Recovery
Services segment.

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 its work during
the quarter ended June 30, 2002 did not indicate an
impairment had occurred with respect to goodwill. The Company
performs its annual impairment review during the second quarter
of each year, and at such other times as the occurrence of
adverse events or changes in circumstances indicate that the
goodwill may be impaired. The impairment review performed during
the second quarter of 2003 did not result in an impairment
charge for the Company.

Long-lived assets consist of property and equipment and other
identifiable intangible assets. These assets are depreciated or
amortized over their estimated useful life, and are subject to
impairment reviews. The Company periodically reviews long-lived
assets whenever adverse events or changes in circumstances
indicate the carrying value of such assets may not be
recoverable. In assessing recoverability, the Company must make
assumptions regarding estimated future cash flows and other
factors to determine if an impairment loss may exist, and, if
so, estimate fair value. The Company also must estimate and make
assumptions regarding the useful lives assigned to its
long-lived assets. If these estimates, or their related
assumptions, change in the future, the Company may be required
to record impairment losses or change the useful life including
accelerating depreciation or amortization for these assets.

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##### Table of Contents



Provision for Income Taxes

Provision for income taxes is based upon the Companys
estimate of taxable income or loss for each respective
accounting period. An asset or liability is recognized for the
deferred tax consequences of temporary differences between the
tax bases of assets and liabilities and their reported amounts
in the financial statements. These temporary differences will
result in taxable or deductible amounts in future periods when
the reported amounts of assets are recovered or liabilities are
settled. The Company regularly reviews its deferred tax assets
to determine the amount that is more likely than not to be
realized. When this amount is less than the deferred tax asset
recorded, the Company records a valuation allowance to reduce
the asset to its estimated realizable value. If the Company
determined that it was not going to be able to fully realize its
recorded deferred tax assets, it would make an adjustment to the
valuation allowance. This would reduce net income in the period
that the Company made its determination. Similarly, if the
Company realized that it was going to be able to fully realize a
deferred tax asset in excess of its net recorded value, net
income would be increased in the period that the Company made
its determination.

The Company also reviews its deferred tax liabilities on a
regular basis to determine that the amount recorded is adequate
to cover the expected reversal of temporary income tax
liabilities. In the event that the amount recorded was less than
adequate, the deferred tax liability would be increased to its
estimated realizable value and net income would be decreased
accordingly. In the event that the deferred tax liability was
determined to be overstated, it would be reduced to its
estimated realizable value and net income would increase
accordingly.

The Company generally determines its effective tax rate by
considering the statutory federal income tax rate, the statutory
state and local tax rates (net of the federal income tax
benefit) and any nondeductible expenses. This rate could also be
affected by increases or decreases to deferred tax assets or
liabilities as described above.

Accrued Expenses

The Company reviews its contingent liabilities, which arise
primarily from litigation and litigation defense costs, in
accordance with Statement of Financial Accounting Standards
No. 5 (SFAS 5), Accounting for
Contingencies. Contingent liabilities are recorded as
liabilities when it is probable that a liability has been
incurred and the amount of the loss is reasonably estimable.
Contingent liabilities are often resolved over long periods.
Estimating probable losses requires judgments about both the
amount of liability, which may or may not be readily
determinable, and the likelihood of liability, which involves
ranges of probability that can at times be broad and depend on
the potential actions of third parties.

Effective January 1, 2002, the Company instituted a program
of self-insurance that offers group healthcare coverage to its
employees and their spouses and dependent children. The
Companys provision for loss from future claims under this
self-insurance program is based upon an independent actuarial
estimate. This provision includes estimated liabilities
determined from both reported paid claims and claims liabilities
incurred but not reported. The accrual for these liabilities is
based on estimates and while management believes that the
provision for loss is adequate, the ultimate liability may be in
excess of or less than the amounts recorded. The methods used in
determining these liabilities are periodically reviewed and
adjustments are reflected in current earnings. The provision for
future healthcare claims of $368,000 and $524,000 at
December 31, 2003 and 2002, respectively, is recorded in
Accrued Expenses as a current liability in the accompanying
Balance Sheet.

Common Stock Options

In December 2002, the FASB issued SFAS No. 148,
Accounting for Stock-Based Compensation 
Transition and Disclosure  an Amendment of
SFAS 123 which provides alternative methods for a
voluntary change to the fair value method of accounting for
stock-based compensation and amends the disclosure requirements
of FAS 123. The Company has elected to continue to account
for options granted under its employee stock-based compensation
plans in accordance with Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to
Employees. As a result, the Company has not recognized

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##### Table of Contents





Impact of Recently Issued Accounting Pronouncements

In November 2002, the FASB issued Emerging Issues Task Force
Issue (EITF) 00-21, Accounting for Revenue Arrangements
with Multiple Deliverables which addresses revenue
recognition accounting by a vendor for arrangements under which
it will perform multiple revenue-generating activities. The
provisions of this statement are effective for revenue
arrangements entered into in fiscal periods beginning after
June 15, 2003. The adoption of EITF 00-21 did not have
a significant impact on the Companys financial statements.

In January 2003, the FASB issued FASB Interpretation
(FIN) 46, Consolidation of Variable Interest
Entities, an Interpretation of ARB No. 51.
FIN 46 requires certain variable interest entities to be
consolidated by the primary beneficiary of the entity if the
equity investors in the entity do not have the characteristics
of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties.
FIN 46 is effective for all new variable interest entities
created or acquired after January 31, 2003. For variable
interest entities created or acquired prior to February 1,
2003, the provisions of FIN 46 must be applied for the
first interim or annual period beginning after June 15,
2003. The Company does not have any variable interest entities
as defined under FIN 46.

In April 2003, the FASB issued SFAS 149, Amendment of
Statement 133 on Derivative Instruments and Hedging
Activities which amends and clarifies the accounting
guidance on derivative instruments and hedging activities that
fall within the scope of SFAS 133, Accounting for
Derivative Instruments and Hedging Activities. SFAS 149 is
effective (1) for contracts entered into or modified after
June 30, 2003, with certain exceptions, and (2) for
hedging relationships designated after June 30, 2003. The
Company will apply the provisions of SFAS 149 to future
contracts entered into or future hedging relationships.

In May 2003, the FASB issued SFAS 150, Accounting for
Certain Financial Instruments with Characteristics of both
Liabilities and Equity which establishes standards for how
an issuer classifies and measures certain financial instruments
with characteristics of both liabilities and equity.
SFAS 150 is effective for financial instruments entered
into or modified after May 31, 2003, and otherwise was
effective for the Company on July 1, 2003. The adoption of
SFAS 150 did not have a significant impact on the
Companys financial statements.

In December 2003, the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 104, Revenue
Recognition (SAB 104) which superseded Staff
Accounting Bulletin No. 101, Revenue Recognition in
Financial Statements (SAB 101). SAB 104s
primary purpose was to rescind accounting guidance contained in
SAB 101 related to multiple element revenue arrangements
which was superceded as a result of the issuance of
EITF 00-21, Accounting for Revenue Arrangements with
Multiple Deliverables. EITF 00-21 was effective for
revenue arrangements entered into in fiscal periods beginning
after June 15, 2003. The adoption of EITF 00-21 did
not have a significant impact on the Companys financial
statements. The Company was previously following the
requirements provided under SAB 104 and, accordingly, the
implementation of this pronouncement had no impact on the
Companys financial position or results of operations as
reported.

In December 2003, the FASB issued FIN 46-R,
Consolidation of Variable Interest Entities  an
interpretation of ARB 51 (revised December 2003),
which replaces FIN 46. FIN 46-R incorporates certain
modifications to FIN 46 adopted by the FASB subsequent to the
issuance of FIN 46, including modifications of the scope of
FIN 46. For all non-special purpose entities
(SPE) created prior to February 1, 2003, public

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##### Table of Contents





Healthcare Recovery Services



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

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

Healthcare Recovery Services-Key Operating Indicators

Lives Sold and Installed*


|                                                          |  |              |      |      |  |      |      |   |  |  |       |  
|--------------------------------------------------------- |  | ------------ | ---- | ---- |  | ---- | ---- | - |  |  | ----- | -
|                                                          |  |             
|                                                          |  | Years Ended 
|                                                          |  | December 31,
|                                                          |  |             
|                                                          |  | 2003         |      | 2002 |  | 2001
|                                                          |  |              |      |      |  |     
|Cumulative lives sold, beginning of period                |  |              | 41.6 |      |  |      | 49.1 |   |  |  | 52.5  |  
|                                                         
|                                                         
|                                                         
|                                                         
|Lives from existing client loss, net(1)                   |  |              | (7.8 | )    |  |      | (9.9 | ) |  |  | (10.6 | )
|                                                         
|                                                         
|                                                         
|                                                         
|Lives added from new contracts with existing
    clients  |  |              | 1.3  |      |  |      | 1.2  |   |  |  | 2.0   |  
|                                                         
|                                                         
|                                                         
|                                                         
|Lives added from contracts with new clients               |  |              | 4.8  |      |  |      | 1.2  |   |  |  | 5.2   |  
|                                                          |  |              |      |      |  |      |      |   |  |  |       |  
|Cumulative lives sold, end of period                      |  |              | 39.9 |      |  |      | 41.6 |   |  |  | 49.1  |  
|                                                          |  |              |      |      |  |      |      |   |  |  |       |  
|Lives sold eliminations/cross-sold lives(2)               |  |              | 15.0 |      |  |      | 12.9 |   |  |  | 7.3   |  
|                                                          |  |              |      |      |  |      |      |   |  |  |       |  
|Lives installed, end of period                            |  |              | 33.8 |      |  |      | 39.9 |   |  |  | 45.5  |  
|                                                          |  |              |      |      |  |      |      |   |  |  |       |  
|Lives installed eliminations/cross-installed
    lives(3) |  |              | 10.2 |      |  |      | 4.9  |   |  |  | 4.8   |  
|                                                          |  |              |      |      |  |      |      |   |  |  |       |  






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*   | 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, lives installed, or lives
    installed eliminations/cross-installed lives, are derived by the
    Company from information provided to it by clients, which 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 include the overlap (i.e., double
    counting) that occurs when 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 include the
    overlap (i.e., double counting) that occurs when
    multiple healthcare recovery services are provided to the same
    client population.                                        

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##### Table of Contents



Other Key Operating Indicators

|                   |  |                          |         |      |  |      |         |     |  |   |         |    
|------------------ |  | ------------------------ | ------- | ---- |  | ---- | ------- | --- |  | - | ------- | ---
|                   |  |                         
|                   |  | Years Ended December 31,
|                   |  |                         
|                   |  | 2003                     |         | 2002 |  | 2001
|                   |  |                          |         |      |  |     
|Backlog(1)         |  | $                        | 1,521.8 | (2)  |  | $    | 1,559.0 | (2) |  | $ | 1,414.8 | (2)
|                  
|                  
|                  
|                  
|Claims recoveries  |  | $                        | 235.9   |      |  | $    | 248.8   |     |  | $ | 238.5   |    
|                  
|                  
|                  
|                  
|Throughput(3)      |  |                          | 15.3    | %    |  |      | 16.7    | %   |  |   | 18.4    | %  
|                  
|                  
|                  
|                  
|Effective fee rate |  |                          | 27.4    | %    |  |      | 27.6    | %   |  |   | 26.8    | %  
|                  
|                  
|                  
|                  
|Claims revenues    |  | $                        | 64.7    |      |  | $    | 68.8    |     |  | $ | 64.0    |    






|    |                                                                                                                                                                                                                                                                                    
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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 December 31, 2003, 2002 and 2001, approximately
    $289.8 million, $370.2 million and
    $133.0 million, respectively, of the backlog derived from
    terminated clients and clients that, by that date, had given
    notice of termination. See Concentration of Clients.
|(3) | Throughput equals claims recoveries for the period divided by
    the average of backlog at the beginning and end of the period.                                                                                                                                                   

2003 Compared to 2002

Claims Revenues. Healthcare Recovery Services revenues
for the year ended December 31, 2003 decreased 6.0%, to
$64.7 million from $68.8 million in 2002, on a decline
in recoveries and in the effective fee rate. The effective fee
rate decreased to 27.4% in 2003 from 27.6% in 2002, primarily as
a result of a shift in the mix of recoveries, with relatively
more recoveries coming from lower priced contract arrangements.

Healthcare claims recoveries for 2003 decreased approximately
$12.9 million, or 5.2%, from 2002 claims recoveries.
Healthcare subrogation recoveries for 2003 were approximately
$18.6 million, or 9.0%, less than in the prior year,
primarily due to a decrease in the number of installed lives.
Provider bill audit recoveries increased approximately
$4.6 million, or 11.7 %, compared to 2002, primarily
because of an increase in the number of audits performed by the
Company. Significant increases in the hospital fee-for-service
charges, due in part to medical inflation, resulted in more
hospital claims meeting the Companys threshold for data
mining and audit. Total backlog decreased 2.4% to
$1,521.8 million as of December 31, 2003 from
$1,559.0 million as of December 31, 2002. The
subrogation backlog decreased approximately $177.8 million, or
19.4%, compared to the prior year, because of the decline in the
number of installed lives for this service and the related
liquidation of the backlog from terminated subrogation clients.
The provider bill audit backlog grew approximately
$138.3 million, or 21.7%, compared to the prior year as a
result of the increase in the number of hospital claims meeting
the Companys threshold for audit and of improvements to
data mining identification of audit-worthy claims. The decline
in total throughput from 16.7% in 2002 to 15.3% in 2003,
resulted from two causes. The first is the effect of the shift
in the backlog mix, with a greater percentage of backlog and
recoveries coming from provider bill audit, which typically
exhibits a lower throughput than does healthcare subrogation.
Second, recoveries for the year ended December 31, 2003
contained, relative to the year ended December 31, 2002, a
higher percentage of dollars derived from the backlog of
terminated subrogation clients, which exhibits a lower
throughput rate than does backlog derived from active
subrogation clients.

Installed lives decreased 6.1 million, from
39.9 million at December 31, 2002 to 33.8 million
at December 31, 2003. The net decrease included an increase
of approximately 2.4 million lives installed related to new
sales and a decrease of approximately 8.5 million lives
related to contract terminations or attrition. Approximately
6.8 million of the total decrease of 8.5 million
installed lives was related to terminations by UHG.

Cost of Revenues. Cost of revenues for the Healthcare
Recovery Services segment decreased 5.3% in 2003 to
$30.1 million from $31.8 million in 2002. However, as
a percentage of claims revenues, the cost of revenues increased
to 46.5% in 2003 from 46.2% in 2002. The decrease in cost of
revenues in total is due to the decrease in volume from
healthcare subrogation. The increase in cost of revenues as a
percentage of claims

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##### Table of Contents





Support Expenses. Support expenses for the Healthcare
Recovery Services segment decreased 4.8% to $4.0 million in
2003, from $4.2 million in 2002 primarily as a result of a
decrease in incentive compensation in 2003. Support expenses as
a percentage of claims revenues were 6.2% in 2003, the same as
in 2002.

Depreciation and Amortization. Depreciation and
amortization expenses decreased 34.0% to $2.7 million for
the year ended December 31, 2003 from $4.1 million in
2002. The decrease in depreciation expense was due to a
significant number of fixed assets acquired in prior years
becoming fully depreciated during the year ended
December 31, 2003.

Income before Income Taxes. Income before income taxes
for the year ended December 31, 2003 decreased
$0.8 million, or 2.8%, to $28.0 million from
$28.8 million for the year ended December 31, 2002.
The primary reason for the decrease was the decrease in
healthcare subrogation revenue of $5.2 million which was
not fully offset by the growth in provider bill audit revenue of
$0.8 million in 2003 compared to 2002, both described above
under Claims Revenues.

2002 Compared to 2001

Claims Revenues. Healthcare Recovery Services revenues
for the year ended December 31, 2002 increased 7.5%, to
$68.8 million from $64.0 million in 2001. This growth
in claims revenues came primarily from two sources. First,
provider bill audit revenue increased $3.4 million in 2002
compared to 2001. The Company realized approximately $300,000
from a special provider bill audit project during 2002. The
remainder of the increase in provider bill audit revenue was
primarily the result of procedures implemented by the Company in
late 2001 in response to various hospitals attempts to
limit the Companys access to medical records, which
impeded the audit of provider bills. Second, the Company
realized $1.7 million of incremental healthcare subrogation
revenue from the fee increase associated with the decline in
lives from UHG. The effective fee rate increased to 27.6% in
2002 from 26.8% in 2001, primarily as a result of the UHG fee
increase.

Healthcare claims recoveries for 2002 increased approximately
$10.3 million, or 4.3%, from 2001 claims recoveries.
Healthcare subrogation recoveries for 2002 were approximately
$1.0 million, or 0.5%, less than in the prior year,
primarily due to a decrease in throughput. Provider bill audit
recoveries increased approximately $10.1 million, or 33.9%,
compared to 2001, in large part due to hospital access issues
encountered during the first three quarters of 2001. Total
backlog increased 10.2% to $1,559.0 million as of
December 31, 2002 from $1,414.8 million as of
December 31, 2001. Although most of the backlog growth
related to provider bill audit, subrogation backlog increased
approximately $5.1 million, or 0.6%, compared to the prior
year. The decline in total throughput from 18.4% in 2001 to
16.7% in 2002, was 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 throughput than does healthcare subrogation.

Installed lives decreased 5.6 million, from
45.5 million at December 31, 2001 to 39.9 million
at December 31, 2002. The net decrease included an increase
of approximately 3.0 million lives installed related to new
sales and a decrease of approximately 8.5 million lives
related to contract terminations or attrition. Approximately
6.7 million of the total decrease of 8.5 million
installed lives was related to UnitedHealth Group.

Cost of Revenues. Cost of revenues for the Healthcare
Recovery Services segment increased 2.3% in 2002 to
$31.8 million from $31.1 million in 2001. As a
percentage of claims revenues, cost of revenues decreased to
46.2% in 2002 from 48.6% in 2001. The increase in cost of
revenues in total is due to the increase in volume from provider
bill audit. The decrease in cost of revenues as a percentage of
claims revenues in 2002 compared to 2001 was primarily due to
the increase in claims revenues described above.

Support Expenses. Support expenses for the Healthcare
Recovery Services segment decreased 14.3% to $4.2 million
in 2002, from $4.9 million in 2001. Support expenses as a
percentage of claims revenues decreased from 7.6% in 2001 to
6.2% in 2002. The decrease in support expenses as a percentage
of claims

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##### Table of Contents





Depreciation and Amortization. Depreciation and
amortization expenses decreased 31.8% to $4.1 million for
the year ended December 31, 2002 from $6.0 million in
2001. The decrease in amortization expense was due to the
adoption of FAS 142 by the Company on January 1, 2002.
See Item 8. Financial Statements and Supplementary
Data  Note 7  Goodwill and Other
Intangible Assets.

Income before Income Taxes. Income before income taxes
for the year ended December 31, 2002 increased
$6.5 million, or 28.9%, to $28.8 million from
$22.3 million for the year ended December 31, 2001.
The reasons for the increase were the additional provider bill
audit revenue of $3.4 million in 2002 compared to 2001 and
the incremental Healthcare Recovery Services revenue from the
UHG contract termination in 2002 of $1.7 million, both
described above under Claims Revenues, as well as
the adoption of FAS 142 on January 1, 2002, as
described under Depreciation and Amortization.

Property and Casualty Recovery Services



| |                      
| | ---------------------
| | 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

|                                        |  |                          |    |      |  |      |    |   |  |  |    | 
|--------------------------------------- |  | ------------------------ | -- | ---- |  | ---- | -- | - |  |  | -- | 
|                                        |  |                         
|                                        |  | Years Ended December 31,
|                                        |  |                         
|                                        |  | 2003                     |    | 2002 |  | 2001
|                                        |  |                          |    |      |  |     
|Contracts in Force, beginning of period |  |                          | 27 |      |  |      | 14 |   |  |  | 2  | 
|                                       
|                                       
|                                       
|                                       
|Outsourcing(1)                          |  |                          | 3  |      |  |      | 1  |   |  |  | 3  | 
|                                       
|                                       
|                                       
|                                       
|Referrals/Closed Claims(2)              |  |                          | 4  |      |  |      | 13 |   |  |  | 9  | 
|                                       
|                                       
|                                       
|                                       
|Terminations                            |  |                          | (4 | )    |  |      | (1 | ) |  |  |   | 
|                                        |  |                          |    |      |  |      |    |   |  |  |    | 
|Contracts in Force, end of period       |  |                          | 30 |      |  |      | 27 |   |  |  | 14 | 
|                                        |  |                          |    |      |  |      |    |   |  |  |    | 






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

|                   |  |                          |      |      |  |      |      |   |  |   |      |  
|------------------ |  | ------------------------ | ---- | ---- |  | ---- | ---- | - |  | - | ---- | -
|                   |  |                         
|                   |  | Years Ended December 31,
|                   |  |                         
|                   |  | 2003                     |      | 2002 |  | 2001
|                   |  |                          |      |      |  |     
|Backlog(1)         |  | $                        | 17.9 |      |  | $    | 15.3 |   |  | $ | 3.6  |  
|                  
|                  
|                  
|                  
|Claims recoveries  |  | $                        | 4.9  |      |  | $    | 2.8  |   |  | $ | 0.6  |  
|                  
|                  
|                  
|                  
|Throughput(2)      |  |                          | 29.3 | %    |  |      | 29.6 | % |  |   | 16.7 | %
|                  
|                  
|                  
|                  
|Effective fee rate |  |                          | 20.3 | %    |  |      | 24.2 | % |  |   | 29.2 | %
|                  
|                  
|                  
|                  
|Claims revenues    |  | $                        | 1.0  |      |  | $    | 0.7  |   |  | $ | 0.2  |  






|    |                                                                                                                                                             
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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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2003 Compared to 2002

Claims Revenues. Total Property and Casualty Recovery
Services revenues for the year ended December 31, 2003
increased $311,000, or 45.9%, from the year ended
December 31, 2002. Property and Casualty Recovery Services
claims recoveries for 2003 were $4.9 million, an increase
of $2.1 million over 2002. Backlog grew from
$15.3 million as of December 31, 2002 to
$17.9 million as of December 31, 2003. The recoveries
and revenues increased at a greater rate than did the backlog
due to business signed in the middle of 2002 which provided a
significant increase to the backlog in 2002 but did not begin to
produce significant recoveries until 2003.

The Property and Casualty Recovery Services segment had a
throughput rate of approximately 29.3% and 29.6% of average
backlog for the years ended December 31, 2003 and 2002,
respectively. The decrease was due to average backlog growing
slightly more than recoveries for the year ended
December 31, 2003 compared to the year ended
December 31, 2002.

The Property and Casualty Recovery Services effective fee rate
for the year ended December 31, 2003 decreased to 20.3%
from 24.2% in 2002. 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 during the year ended December 31, 2003.

Cost of Revenues. Cost of revenues for the Property and
Casualty Recovery Services segment increased 36.4% for the year
ended December 31, 2003 to $1.5 million, from
$1.1 million in 2002. The increase was due to the addition
of human resources and other expenses necessary to service the
additional backlog. As a percentage of claims revenues, cost of
revenues decreased to 153% in 2003 compared to 163% in 2002, due
to the increase in revenue described above. In the subrogation
industry, typically expenses related to investigations and other
recovery-related activities are incurred well in advance of
revenue recognition.

Support Expenses. Support expenses for the Property and
Casualty Recovery Services segment were $0.4 million in
2003 and 2002. Support expenses decreased as a percentage of
claims revenues from 62.2% in 2002 to 37.5% in 2003. The
decrease in support expenses as a percentage of revenue resulted
from the increase in revenue noted above under Claims
Revenues.

2002 Compared to 2001

Claims Revenues. Total Property and Casualty Recovery
Services revenues for the year ended December 31, 2002
increased $491,000, or 263%, from the year ended
December 31, 2001. Property and Casualty Recovery Services
claims recoveries for 2002 were $2.8 million, an increase
of $2.2 million over 2001. The growth in recoveries and
revenues was caused by an increase in backlog from
$3.6 million as of December 31, 2001 to
$15.3 million as of December 31, 2002. Backlog growth
was the result of the addition of 14 new client contracts
during the year ended December 31, 2002 and the
identification of additional potentially recoverable claims for
clients in place at December 31, 2001.

The Property and Casualty Recovery Services segment had a
throughput rate of approximately 29.6% and 16.7% of average
backlog for the years ended December 31, 2002 and 2001,
respectively. The increase was due to recoveries growing more
quickly than the average backlog over the year ended
December 31, 2002.

The Property and Casualty Recovery Services effective fee rate
for the year ended December 31, 2002 decreased to 24.2%
from 29.2% 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 during the year ended December 31, 2002.

Cost of Revenues. Cost of revenues for the Property and
Casualty Recovery Services segment increased 120% for the year
ended December 31, 2002 to $1.1 million, from
$0.5 million in 2001. The increase was due to the addition
of human resources and other expenses necessary to service the
additional backlog. As a percentage of claims revenues, cost of
revenues decreased to 163% in 2002 compared to 266% in 2001, due
to the increase in revenue described above. In the subrogation
industry, typically expenses related to investigations and other
recovery-related activities are incurred well in advance of
revenue recognition.

32



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##### Table of Contents



Support Expenses. Support expenses for the Property and
Casualty Recovery Services segment decreased 50% to
$0.4 million in 2002 from $0.8 million in 2001.
Support expenses decreased as a percentage of claims revenues
from 403% in 2001 to 62% in 2002. The decrease in support
expenses resulted from the movement of certain sales and
marketing personnel from the Property and Casualty Services
segment to Corporate Sales & Marketing. Prior year
amounts have not been reclassified because management of the
Company views this as a change in position.

Software



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

2003 Compared to 2002

Revenues. Revenues for the Software segment increased to
$1.8 million for the year ended December 31, 2003 from
$0.8 million for the year ended December 31, 2002. All
but $75,000 and $12,000 of the revenue for the years ended
December 31, 2003 and 2002, respectively, was derived from
internal clients (i.e., the Healthcare Recovery Services and
Property and Casualty Recovery Services segments).

Cost of Revenues. Cost of revenues for the Software
segment for 2003 was approximately $1.0 million, an
increase of $0.4 million, or 67%, over 2002. This includes
approximately $825,000 and $454,000 for the years ended
December 31, 2003 and 2002, respectively, of depreciation
and amortization of software in service. Approximately $138,000
and $144,000, respectively, of the cost of revenues for the
years ended December 31, 2003 and 2002 related to the
support and maintenance of the software.

Support Expenses. For the years ended December 31,
2003 and 2002, the Software segment incurred approximately
$2.1 million and $1.9 million, respectively, in
expenditures in connection with the creation of new software
products for the insurance industry. Approximately
$0.8 million and $1.1 million of support expenditures
were capitalized in 2003 and 2002, respectively, resulting in
net reported expenses of $1.3 million and
$0.8 million, respectively.

The Company expects to incur additional expenses of between
$1.0 million and $1.5 million with respect to
enhancements of existing software applications to be made in
2004, of which approximately $600,000 is expected to be
capitalized. In addition, as of December 31, 2003, the
Company had capitalized approximately $2.8 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.

2002 Compared to 2001

Revenues. The Software segment recognized $764,000 in
revenue during the year ended December 31, 2002, all
derived from internal clients (i.e., the Healthcare Recovery
Services and Property and Casualty Recovery Services segments)
except for $12,000.

Cost of Revenues. Cost of revenues for the Software
segment for the year ended December 31, 2002 was
approximately $598,000. This includes approximately $454,000 of
depreciation and amortization of software in service.
Approximately $144,000 of the cost of revenues for the year
ended December 31, 2002 related to the support and
maintenance of the software.

Support Expenses. For the year ended December 31,
2002, the Software segment incurred approximately
$1.9 million in expenditures in connection with the
creation of new software products for the insurance industry.
Approximately $1.1 million of support expenditures were
capitalized in 2002, resulting in net reported expenses of
$0.8 million.

Research and Development. The Company incurred
approximately $1.6 million of expenses in 2001 related to
research and development activities in connection with the
creation of new products for the insurance industry, of which
approximately $1.1 million were capitalized, resulting in
net reported expenses of $0.5 million. There were no
research and development expenses in the year ended
December 31, 2002 because the products that were in
development in 2001 became operational in 2002. See Item 1.
Business  Industry  Software.

33



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##### Table of Contents



Entire Company

Employees

|                  |  |              |     |      |  |      |     |  |  |  |     | 
|----------------- |  | ------------ | --- | ---- |  | ---- | --- |  |  |  | --- | 
|                  |  |             
|                  |  | December 31,
|                  |  |             
|                  |  | 2003         |     | 2002 |  | 2001
|                  |  |              |     |      |  |     
|Direct operations |  |              | 464 |      |  |      | 522 |  |  |  | 555 | 
|                 
|                 
|                 
|                 
|Support           |  |              | 127 |      |  |      | 144 |  |  |  | 143 | 
|                  |  |              |     |      |  |      |     |  |  |  |     | 
|Total employees   |  |              | 591 |      |  |      | 666 |  |  |  | 698 | 
|                  |  |              |     |      |  |      |     |  |  |  |     | 

2003 Compared to 2002

Support Expenses. During 2003, the Company incurred
$1.5 million of charges related to the exploration of
strategic alternatives. See  Recent
Developments.

Depreciation and Amortization. Depreciation and
amortization expenses decreased 29.2% to $3.4 million for
the year ended December 31, 2003 from $4.8 million in
2002. The decrease is due to a significant number of fixed
assets acquired in prior years becoming fully depreciated in
2003. In addition, approximately $825,000 and $454,000 of
depreciation and amortization related to the Software segment is
included in cost of revenues for the years ended
December 31, 2003 and 2002, respectively, as it is a direct
cost of software in service.

Interest Income. Interest income decreased
$0.1 million, or 32.1%, for the year ended
December 31, 2003 as compared to the year ended
December 31, 2002. The decrease was primarily due to lower
interest rates during 2003.

Interest Expense. Interest expense totaled
$0.4 million and $0.5 million for the years ended
December 31, 2003 and 2002, respectively. The decrease in
interest expense for 2003 was primarily due to a decrease in
borrowed funds in 2003.

Tax. For the year ended December 31, 2003, the
Company accrued income taxes at a 40.0% effective tax rate. This
is a reduction from the Companys pre-2002 historical
effective tax rate due to the implementation of state tax
planning initiatives beginning July 1, 2002.

The Company accrued its income tax at an effective rate of 38.3%
for the year ended December 31, 2002. This rate was lower
than the Companys historical effective income tax rate due
to research and experimental tax credits, which included a
one-time recapture for the previous four tax years, and state
tax planning initiatives implemented during 2002.

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 year ended
December 31, 2003 decreased $1.0 million, or 14.9%, to
$5.8 million or $0.66 per diluted common share, from
$6.8 million, or $0.72 per diluted common share, for the
year ended December 31, 2002. The primary reasons for the
decreases in net income and diluted earnings per share were:
(i) the decrease in 2003 revenues from the Healthcare
Recovery Services segment described above, (ii) the charges
of approximately $918,000, net of tax, related to the
exploration of strategic alternatives in 2003, and
(iii) the decrease in 2003 depreciation expense as
described under Depreciation and Amortization above.

2002 Compared to 2001

Depreciation and Amortization.Depreciation and
amortization expenses decreased 29.0% to $4.8 million for
the year ended December 31, 2002 from $6.7 million in
2001. The decrease in amortization expense was due to the
adoption of FAS 142 by the Company on January 1, 2002.
See Item 8. Financial Statements and Supplementary
Data  Note 7  Goodwill and Other
Intangible Assets. In addition, approximately $454,000 of
depreciation and amortization related to the Software segment is
included in Cost of Revenues for

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Interest Income.Interest income decreased
$0.5 million, or 66.6%, for the year ended
December 31, 2002 as compared to the year ended
December 31, 2001. The decrease was primarily 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 in 2002.

Interest Expense.Interest expense totaled
$0.5 million and $0.9 million for the years ended
December 31, 2002 and 2001, respectively. The decrease in
interest expense for 2002 was 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.

Other  Loss on Disposal of Assets.In November
2001, the Company sold its building in New Berlin, Wisconsin to
a third party at a loss of $1.0 million. The Company
acquired the building on January 25, 1999 in the Subro
Audit Acquisition.

Tax.The Company accrued its income tax at an effective
rate of 38.3% for the year ended December 31, 2002. This
rate was lower than the Companys historical effective
income tax rate due to research and experimental tax credits,
which included a one-time recapture for the previous four tax
years, and state tax planning initiatives implemented during
2002.

The effective income tax rate was approximately 31.3% for the
year ended December 31, 2001. The lower effective income
tax rate as compared to 2002, resulted from the reversal in 2001
of previously accrued taxes reducing the tax provision for the
third quarter 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 year ended
December 31, 2002 increased $2.2 million, or 48.6%, to
$6.8 million or $0.72 per diluted common share, from
$4.6 million, or $0.46 per diluted common share, for the
year ended December 31, 2001. The primary reasons for the
increases in net income and diluted earnings per share were: the
loss on the sale of the Milwaukee building ($591,000 after tax)
in 2001, the reversal of previously accrued income taxes
described below under Tax in 2001, the adoption of
FAS 142 on January 1, 2002 as described under
Depreciation and Amortization above and the
incremental Healthcare Recovery Services revenue from the UHG
contract termination in 2002. See Concentration of
Clients.

Liquidity and Capital Resources

The Companys statements of cash flows for the years ended
December 31, 2003, 2002 and 2001 are summarized below:

|                                                         |  |                          |        |      |  |      |         |   |  |   |        |  
|-------------------------------------------------------- |  | ------------------------ | ------ | ---- |  | ---- | ------- | - |  | - | ------ | -
|                                                         |  |                         
|                                                         |  | Years Ended December 31,
|                                                         |  |                         
|                                                         |  | 2003                     |        | 2002 |  | 2001
|                                                         |  |                          |        |      |  |     
|                                                         |  |                         
|                                                         |  | (In thousands)          
|                                                        
|                                                        
|                                                        
|                                                        
|Net cash provided by operating activities                |  | $                        | 12,127 |      |  | $    | 13,724  |   |  | $ | 5,952  |  
|                                                        
|                                                        
|                                                        
|                                                        
|Net cash (used in) provided by investing
    activities  |  |                          | (2,505 | )    |  |      | (3,925  | ) |  |   | 1,327  |  
|                                                        
|                                                        
|                                                        
|                                                        
|Net cash (used in) financing activities                  |  |                          | (717   | )    |  |      | (10,077 | ) |  |   | (6,029 | )
|                                                         |  |                          |        |      |  |      |         |   |  |   |        |  
|Net increase (decrease) in cash and cash
    equivalents |  | $                        | 8,905  |      |  | $    | (278    | ) |  | $ | 1,250  |  
|                                                         |  |                          |        |      |  |      |         |   |  |   |        |  

The Company had working capital of $13.0 million at
December 31, 2003, including cash and cash equivalents of
$11.2 million, compared with working capital of
$8.8 million at December 31, 2002.

Net cash provided by operating activities decreased
$1.6 million for the year ended December 31, 2003
compared to 2002, primarily due to the payment of incentive
compensation that was accrued as an expense in

35



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##### Table of Contents





Net cash used in investing activities for the years ended
December 31, 2003 and 2002 includes purchases of property
and equipment principally related to the development and
conversion to the Troveris software. The Company capitalized
approximately $1.0 million and $1.9 million,
respectively, of internally-developed software during 2003 and
2002.

Net cash used in financing activities for the year ended
December 31, 2002 reflects $4.0 million in net cash
repayments, with respect to the Companys Revolving Credit
Facility. The Company repurchased approximately $0.9 million and
$6.5 million of treasury stock during the years ended
December 31, 2003 and 2002, 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 collateralized 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 December 31, 2003, the
interest rate was 2.92% based on the one-month Eurodollar Rate
plus the fixed margin. The Revolving Credit Facility contains
customary covenants and events of default including, but not
limited to, financial tests for interest coverage, net worth
levels and leverage that may limit the Companys ability to
pay dividends. The Company was in compliance with these
covenants at December 31, 2003. It also contains a material
adverse change clause. At December 31, 2003, $4 million was
outstanding under the Revolving Credit Facility. Effective
November 1, 2003, this balance was classified as short-term
borrowings in the current liabilities section of the balance
sheet because the Revolving Credit Facility matures on
October 31, 2004. See Item 8. Financial
Statements and Supplementary Data 
Note 10  Derivatives and
 Note 11  Credit Facility.

At December 31, 2003 and 2002, the Company reported as a
current asset on its balance sheets, restricted cash of
$17.0 million and $17.8 million, respectively.
Restricted cash at December 31, 2003 and 2002 represented
claims recoveries by the Company for its clients. At
December 31, 2003 and 2002, the Company reported on its
balance sheets, as a current liability, funds due clients of
$12.0 million and $12.4 million, respectively,
representing recoveries to be distributed to clients, net of the
fee earned on such recoveries.

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.

36



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##### Table of Contents



Contractual Obligations and Commercial Commitments

The following summarizes the Companys contractual
obligations at December 31, 2003, and the effect such
obligations are expected to have on its liquidity and cash flows
in future periods (in thousands):

|                         |                               |       |   |           |  |       |   |       |  |         |   |       |  |  |   |       |  |  |   |     | 
|------------------------ | ----------------------------- | ----- | - | --------- |  | ----- | - | ----- |  | ------- | - | ----- |  |  | - | ----- |  |  | - | --- | 
|                         |                               |       |   |           |  |       |   |       |  | More   
|                         |                               |       |   | Less Than |  | 1-3   |   | 4-5   |  | Than   
|                         |                               | Total |   | 1 Year    |  | Years |   | Years |  | 5 Years
|                         |                               |       |   |           |  |       |   |       |  |        
|Contractual Obligations: |                               |       |   |           |  |       |   |       |  |         |   |       |  |  |   |       |  |  |   |    
|                        
|                        
|                        
|                        
|                         | Short-term borrowings         |       | $ | 4,000     |  |       | $ | 4,000 |  |         | $ |      |  |  | $ |      |  |  | $ |    | 
|                        
|                        
|                        
|                        
|                         | Operating leases              |       |   | 10,126    |  |       |   | 2,340 |  |         |   | 4,528 |  |  |   | 2,868 |  |  |   | 390 | 
|                        
|                        
|                        
|                        
|                         | Deferred compensation         |       |   | 261       |  |       |   |      |  |         |   | 201   |  |  |   |      |  |  |   | 60  | 
|                        
|                        
|                        
|                        
|                         | Purchase obligations          |       |   |          |  |       |   |      |  |         |   |      |  |  |   |      |  |  |   |    | 
|                         |                               |       |   |           |  |       |   |       |  |         |   |       |  |  |   |       |  |  |   |    
|                         | Total contractual obligations |       | $ | 14,387    |  |       | $ | 6,340 |  |         | $ | 4,729 |  |  | $ | 2,868 |  |  | $ | 450 | 
|                         |                               |       |   |           |  |       |   |       |  |         |   |       |  |  |   |       |  |  |   |    

External Factors

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

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

Concentration of Clients

The Company provides services to healthcare plans that as of
December 31, 2003 covered approximately 39.9 million
lives. The Companys clients are national and regional
healthcare payors, large third-party administrators or
self-insured corporations. The Company currently has one client,
Wellpoint Health Network Inc., that individually accounts for
more than 10% of the Companys revenue. It also has a
former client, UnitedHealth Group (UHG), which
historically accounted for more than 10% of the Companys
revenue. For the years ended December 31, 2003, 2002 and
2001, UHG generated 24%, 28% and 27% of the Companys
revenues, respectively. Wellpoint Health Network Inc. accounted
for 17%, 14% and 11% of the Companys total revenues for
the years ended December 31, 2003, 2002 and 2001,
respectively as well as 30% and 32% of the Companys
accounts receivable balance at December 31, 2003 and 2002,
respectively. HealthNet accounted for 10% and 15% of the
Companys accounts receivable balance at December 31,
2003 and 2002, 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.

37



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##### Table of Contents



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 December 31, 2003, the Company had
Healthcare Recovery Services backlog of $1,521.8 million.

During 2002, UHG management informed the Company of its
intention to terminate subrogation services with respect to all
but 1.8 million lives of the 9.7 million lives then
subject to the Companys services under a contract with
UHG. UHGs termination of these services resulted from
its decision to bring subrogation recovery services back inside
UHG, where they are being performed by its Ingenix strategic
business unit. The Companys contract with UHG expired in
accordance with its terms on February 1, 2003, except with
respect to the 1.8 million lives. In December 2003,
UHG gave notice of the termination of the remaining business
under contract, effective February 1, 2004. The Company
expects to continue recovering on the backlog as to which UHG
terminated the Companys services, a process that the
Company expects will be completed in 5 to 6 years from the
dates of termination.

Other Matters



| |                      
| | ---------------------
| | 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 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 terminates the stock
repurchase plan. The Company repurchased 172,622 shares of
Common Stock during the year ended December 31, 2003 at a
cost of $0.9 million, or an average cost of $5.23 per
share. From inception of the program through December 31,
2003, the Company repurchased 3,269,630 shares at a cost of
$14.5 million, or an average cost of $4.43 per share.
Except for 8,874 shares previously repurchased but reissued in
connection with an employee restricted stock award, all of the
reacquired shares of Common Stock through December 31, 2003
are reflected as treasury stock on the accompanying Balance
Sheets.



| |                          
| | -------------------------
| | Adoption of a Rights Plan

On February 12, 1999, the Board of Directors adopted a
Stockholder Rights Plan and declared a dividend of one preferred
stock purchase right (a Right) for each outstanding
share of Common Stock of the Company. The dividend was payable
to stockholders of record on March 1, 1999. The Rights,
which initially trade with the Common Stock, separate and become
exercisable only upon the earlier to occur of
(i) 10 days after the date (the Stock
Acquisition Date) of a public announcement that a person
or group of affiliated persons has acquired 20% or more of the
Common Stock (such person or group being hereinafter referred to
as an Acquiring Person) or (ii) 10 days
(or such later date as the Board of Directors shall determine)
after the commencement of, or announcement of an intention to
make, a tender offer or exchange offer that could result in such
person or group owning 20% or more of the Common Stock (the
earlier of such dates being called the Distribution
Date). When exercisable, each Right initially entitles the
registered holder to purchase from the Company one one-hundredth
of a share of a newly created class of preferred stock of the
Company at a purchase price of $65 (the Purchase
Price). The Rights are redeemable for $0.001 per Right at
the option of the Board of Directors. The Rights expire on
March 1, 2009.

If any person becomes an Acquiring Person, each holder of a
Right will thereafter have the right (the Flip-In
Right) to receive, in lieu of shares of preferred stock
and upon payment of the Purchase Price, shares of Common Stock
having a value equal to two times the Purchase Price of the
Right. Also, if at any time on or after the Stock Acquisition
Date, (i) the Company is acquired in a transaction in which
the holders of all the outstanding shares of Common Stock
immediately prior to the consummation of the transaction are not
the holders of all of the surviving corporations voting
power, or (ii) more than 50% of the Companys

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On February 19, 2004, in connection with the Proposed
Transaction, the Company and National City Bank, as Rights
Agent, executed a First Amendment to Rights Agreement, which
amends the Stockholders Rights Plan and renders the Rights
inapplicable to the transactions contemplated by the definitive
agreement announced by the Company on February 20, 2004.
See  Recent Developments.



| |                           
| | --------------------------
| | Related Party Transactions

The Company has entered into a contract for legal services with
a professional service corporation, Sharps &
Associates, PSC, an entity owned solely by one of the
Companys officers, Douglas R. Sharps. This
arrangement exists solely for the benefit of the Company. 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, PSC are reviewed
and approved by the Audit Committee of the Companys Board
of Directors. For the years ended December 31, 2003, 2002
and 2001, approximately $3.4 million, $3.3 million and
$3.4 million was paid to this law firm for such legal
services, including all employee and other expenses.

In 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s 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
December 31, 2003, the promissory note of $886,520 and
accrued interest of $101,237 were outstanding.

On June 30, 2000, pursuant to Board authorization and in
accordance with the terms of the Amended Promissory Note, the
Company and Mr. McGinnis entered into a deferred
compensation agreement (the Agreement). Under the
Agreement, 50% of the amount otherwise payable to
Mr. McGinnis under the Companys Management Group
Incentive Compensation Plan is to be deferred until the Amended
Promissory Note is paid in full, with such deferred compensation
then being paid in full to Mr. McGinnis within 30 days
thereafter. The Company has full right of set-off against any
deferred compensation under the Agreement should
Mr. McGinnis default under the Amended Promissory Note. At
the election of Mr. McGinnis, the payment of the deferred
compensation, upon payment of the Amended Promissory Note,

39



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##### Table of Contents





Effective January 1, 2003, the Company entered into an
employment agreement with Mr. McGinnis. Upon signing the
employment agreement, Mr. McGinnis received a bonus of
$200,000. The bonus is subject to full or partial reimbursement
by Mr. McGinnis to the Company, based on the date of
termination, if Mr. McGinnis terminates his employment with
the Company during the initial three-year term of his employment
under the agreement. The bonus payment is recorded in
Other Current Assets on the accompanying Condensed
Balance Sheets and is being amortized over the term of the
agreement. The unamortized balance at December 31, 2003 was
$133,333.




Item 7A.     Quantitative
and Qualitative Market Risk Disclosures

The Company is subject to interest rate risk arising from the
impact of changes in interest rates on its variable rate
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. 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 2004. As of December 31, 2003, the Company had
$4.0 million outstanding under its Revolving Credit
Facility. Through the interest rate swap contract the Company
has entered into, the Company has fixed the interest rate on the
entire $4.0 million of the Revolving Credit Facility at
5.41% or 5.66% (contingent on the status of a financial ratio).
Because of the Companys interest rate swap agreement,
changes in interest rates would have no effect on the
Companys interest expense on an annual basis. See
Item 7. Managements Discussion and
Analysis of Financial Condition and Results of
Operations  Liquidity and Capital Resources and
Item 8. Financial Statements and Supplementary
Data  Note 10  Derivatives and
 Note 11  Credit Facility.

40



---



##### Table of Contents








|        |                                            
|------- | -------------------------------------------
|Item 8. | Financial Statements and Supplementary Data

REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Stockholders



In our opinion, the accompanying balance sheets and the related
statements of income, changes in stockholders equity and
comprehensive income and cash flows present fairly, in all
material respects, the financial position of Trover Solutions,
Inc. (the Company) at December 31, 2003 and
2002, and the results of its operations and its cash flows for
each of the three years in the period ended December 31,
2003, in conformity with accounting principles generally
accepted in the United States of America. These financial
statements are the responsibility of the Companys
management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used
and significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

As discussed in Note 2 to the financial statements, the Company
ceased amortizing goodwill effective January 1, 2002.

PricewaterhouseCoopers LLP

Louisville, Kentucky



41



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##### Table of Contents



TROVER SOLUTIONS, INC.

BALANCE SHEETS

December 31, 2003 and 2002


(In thousands, except per share information)


|                                         |                                                                                                                                                        |                                                                                                                                |                                            |         |       |        |        |         |       |        | 
|---------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------ | ------- | ----- | ------ | ------ | ------- | ----- | ------ | 
|                                         |                                                                                                                                                        | 2003                                                                                                                           |                                            | 2002   
|                                         |                                                                                                                                                        |                                                                                                                                |                                            |        
|                                        
|                                        
|                                        
|                                        
|ASSETS                                  
|                                        
|                                        
|                                        
|                                        
|Current assets:                          |                                                                                                                                                        |                                                                                                                                |                                            |         |       |        |        |        
|                                        
|                                        
|                                        
|                                        
|                                         | Cash and cash equivalents                                                                                                                              |                                                                                                                                | $                                          | 11,174  |       |        | $      | 2,269   |      
|                                        
|                                        
|                                        
|                                        
|                                         | Restricted cash                                                                                                                                        |                                                                                                                                |                                            | 17,034  |       |        |        | 17,764  |      
|                                        
|                                        
|                                        
|                                        
|                                         |                                                                                                                                                        | Accounts receivable, less allowance for doubtful
    accounts of $479 and $531 at December 31, 2003 and 2002,
    respectively |                                            |         | 6,993 |        |        |         | 9,389 |       
|                                        
|                                        
|                                        
|                                        
|                                         | Other current assets                                                                                                                                   |                                                                                                                                |                                            | 3,039   |       |        |        | 2,319   |      
|                                         |                                                                                                                                                        |                                                                                                                                |                                            |         |       |        |        |        
|                                         |                                                                                                                                                        |                                                                                                                                | Total current assets                       |         |       | 38,240 |        |         |       | 31,741 | 
|                                         |                                                                                                                                                        |                                                                                                                                |                                            |         |       |        |        |        
|Property and equipment, net              |                                                                                                                                                        |                                                                                                                                | 5,813                                      |         |       |        | 6,452  |        
|                                        
|                                        
|                                        
|                                        
|Goodwill, net                            |                                                                                                                                                        |                                                                                                                                | 29,146                                     |         |       |        | 29,146 |        
|                                        
|                                        
|                                        
|                                        
|Identifiable intangibles, net            |                                                                                                                                                        |                                                                                                                                | 3,315                                      |         |       |        | 3,810  |        
|                                        
|                                        
|                                        
|                                        
|Other assets                             |                                                                                                                                                        |                                                                                                                                | 1,982                                      |         |       |        | 2,424  |        
|                                         |                                                                                                                                                        |                                                                                                                                |                                            |         |       |        |        |        
|                                         |                                                                                                                                                        |                                                                                                                                | Total assets                               |         | $     | 78,496 |        |         | $     | 73,573 | 
|                                         |                                                                                                                                                        |                                                                                                                                |                                            |         |       |        |        |        
|                                        
|                                        
|                                        
|                                        
|LIABILITIES AND STOCKHOLDERS
    EQUITY
|                                        
|                                        
|                                        
|                                        
|Current liabilities:                     |                                                                                                                                                        |                                                                                                                                |                                            |         |       |        |        |        
|                                        
|                                        
|                                        
|                                        
|                                         | Trade accounts payable                                                                                                                                 |                                                                                                                                | $                                          | 1,250   |       |        | $      | 1,653   |      
|                                        
|                                        
|                                        
|                                        
|                                         | Accrued expenses                                                                                                                                       |                                                                                                                                |                                            | 5,405   |       |        |        | 4,699   |      
|                                        
|                                        
|                                        
|                                        
|                                         | Accrued bonuses                                                                                                                                        |                                                                                                                                |                                            | 1,581   |       |        |        | 3,208   |      
|                                        
|                                        
|                                        
|                                        
|                                         | Funds due clients                                                                                                                                      |                                                                                                                                |                                            | 12,019  |       |        |        | 12,368  |      
|                                        
|                                        
|                                        
|                                        
|                                         | Income taxes payable                                                                                                                                   |                                                                                                                                |                                            | 677     |       |        |        | 429     |      
|                                        
|                                        
|                                        
|                                        
|                                         | Short-term borrowings                                                                                                                                  |                                                                                                                                |                                            | 4,000   |       |        |        |        |      
|                                        
|                                        
|                                        
|                                        
|                                         | Deferred income tax liability                                                                                                                          |                                                                                                                                |                                            | 354     |       |        |        | 616     |      
|                                         |                                                                                                                                                        |                                                                                                                                |                                            |         |       |        |        |        
|                                         |                                                                                                                                                        |                                                                                                                                | Total current liabilities                  |         |       | 25,286 |        |         |       | 22,973 | 
|                                        
|                                        
|                                        
|                                        
|Other liabilities                        |                                                                                                                                                        |                                                                                                                                | 4,562                                      |         |       |        | 3,151  |        
|                                        
|                                        
|                                        
|                                        
|Long-term borrowings                     |                                                                                                                                                        |                                                                                                                                |                                           |         |       |        | 4,000  |        
|                                         |                                                                                                                                                        |                                                                                                                                |                                            |         |       |        |        |        
|                                         |                                                                                                                                                        |                                                                                                                                | Total liabilities                          |         |       | 29,848 |        |         |       | 30,124 | 
|                                         |                                                                                                                                                        |                                                                                                                                |                                            |         |       |        |        |        
|Commitments and contingencies            |                                                                                                                                                        |                                                                                                                                |                                            |         |       |        |        |        
|                                        
|                                        
|                                        
|                                        
|Stockholders equity:                    |                                                                                                                                                        |                                                                                                                                |                                            |         |       |        |        |        
|                                        
|                                        
|                                        
|                                        
|                                         | Preferred stock, $.001 par value;
    2,000 shares authorized; no shares issued or outstanding                                                         |                                                                                                                                |                                            |        |       |        |        |        |      
|                                        
|                                        
|                                        
|                                        
|                                         | Common stock, $.001 par value; 20,000 shares
    authorized; 8,477 shares and 8,588 shares outstanding
    at December 31, 2003 and 2002, respectively |                                                                                                                                |                                            | 12      |       |        |        | 12      |      
|                                        
|                                        
|                                        
|                                        
|                                         | Capital in excess of par value                                                                                                                         |                                                                                                                                |                                            | 23,465  |       |        |        | 23,154  |      
|                                        
|                                        
|                                        
|                                        
|                                         | Other                                                                                                                                                  |                                                                                                                                |                                            | (988    | )     |        |        | (926    | )    
|                                        
|                                        
|                                        
|                                        
|                                         | Treasury stock at cost; 3,261 shares and
    3,088 shares at December 31, 2003 and 2002,
    respectively                                              |                                                                                                                                |                                            | (14,459 | )     |        |        | (13,553 | )    
|                                        
|                                        
|                                        
|                                        
|                                         | Accumulated other comprehensive income                                                                                                                 |                                                                                                                                |                                            | (51     | )     |        |        | (87     | )    
|                                        
|                                        
|                                        
|                                        
|                                         | Unearned compensation                                                                                                                                  |                                                                                                                                |                                            | (28     | )     |        |        | (39     | )    
|                                        
|                                        
|                                        
|                                        
|                                         | Retained earnings                                                                                                                                      |                                                                                                                                |                                            | 40,697  |       |        |        | 34,888  |      
|                                         |                                                                                                                                                        |                                                                                                                                |                                            |         |       |        |        |        
|                                         |                                                                                                                                                        |                                                                                                                                | Total stockholders equity                 |         |       | 48,648 |        |         |       | 43,449 | 
|                                         |                                                                                                                                                        |                                                                                                                                |                                            |         |       |        |        |        
|                                         |                                                                                                                                                        |                                                                                                                                | Total liabilities and stockholders equity |         | $     | 78,496 |        |         | $     | 73,573 | 
|                                         |                                                                                                                                                        |                                                                                                                                |                                            |         |       |        |        |        

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

42



---



##### Table of Contents



TROVER SOLUTIONS, INC.

STATEMENTS OF INCOME

For the years ended December 31, 2003, 2002 and 2001


(Dollars in thousands, except per share information)


|                                    |                            |      |        |        |  |      |        |        |  |   |        |        | 
|----------------------------------- | -------------------------- | ---- | ------ | ------ |  | ---- | ------ | ------ |  | - | ------ | ------ | 
|                                    |                            | 2003 |        | 2002   |  | 2001
|                                    |                            |      |        |        |  |     
|Claims revenues                     |                            | $    | 65,748 |        |  | $    | 69,478 |        |  | $ | 64,147 |       
|                                   
|                                   
|                                   
|                                   
|Cost of revenues                    |                            |      | 32,535 |        |  |      | 33,492 |        |  |   | 31,589 |       
|                                    |                            |      |        |        |  |      |        |        |  |   |        |       
|                                    | Gross profit               |      |        | 33,213 |  |      |        | 35,986 |  |   |        | 32,558 | 
|                                   
|                                   
|                                   
|                                   
|Support expenses                    |                            |      | 19,926 |        |  |      | 19,924 |        |  |   | 17,499 |       
|                                   
|                                   
|                                   
|                                   
|Depreciation and amortization       |                            |      | 3,368  |        |  |      | 4,760  |        |  |   | 6,701  |       
|                                   
|                                   
|                                   
|                                   
|Research and development            |                            |      |       |        |  |      |       |        |  |   | 537    |       
|                                    |                            |      |        |        |  |      |        |        |  |   |        |       
|                                    | Operating income           |      |        | 9,919  |  |      |        | 11,302 |  |   |        | 7,821  | 
|                                   
|                                   
|                                   
|                                   
|Interest income                     |                            |      | 178    |        |  |      | 262    |        |  |   | 785    |       
|                                   
|                                   
|                                   
|                                   
|Interest expense                    |                            |      | (415   | )      |  |      | (494   | )      |  |   | (903   | )     
|                                   
|                                   
|                                   
|                                   
|Other  Loss on disposal of assets  |                            |      |       |        |  |      |       |        |  |   | (1,010 | )     
|                                    |                            |      |        |        |  |      |        |        |  |   |        |       
|                                    | Income before income taxes |      |        | 9,682  |  |      |        | 11,070 |  |   |        | 6,693  | 
|                                   
|                                   
|                                   
|                                   
|Provision for income taxes          |                            |      | 3,873  |        |  |      | 4,240  |        |  |   | 2,097  |       
|                                    |                            |      |        |        |  |      |        |        |  |   |        |       
|                                    | Net income                 |      | $      | 5,809  |  |      | $      | 6,830  |  |   | $      | 4,596  | 
|                                    |                            |      |        |        |  |      |        |        |  |   |        |       
|Earnings per common share (basic)   |                            | $    | 0.69   |        |  | $    | 0.74   |        |  | $ | 0.47   |       
|                                    |                            |      |        |        |  |      |        |        |  |   |        |       
|Earnings per common share (diluted) |                            | $    | 0.66   |        |  | $    | 0.72   |        |  | $ | 0.46   |       
|                                    |                            |      |        |        |  |      |        |        |  |   |        |       

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

43



---



##### Table of Contents



TROVER SOLUTIONS, INC.

STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY AND

COMPREHENSIVE INCOME


For the years ended December 31, 2003, 2002 and 2001


(Dollars in thousands)


|                            |                                                          |              |           |            |   |          |    |          |  |               |        |        |  |   |        |       |  |   |         |        |   |   |     |      |  
|--------------------------- | -------------------------------------------------------- | ------------ | --------- | ---------- | - | -------- | -- | -------- |  | ------------- | ------ | ------ |  | - | ------ | ----- |  | - | ------- | ------ | - | - | --- | ---- | -
|                            |                                                          |              |           | Capital in |   |          |    |          |  | Accumulated  
|                            |                                                          | Common Stock |           | Excess of  |   |          |    |          |  | Other        
|                            |                                                          |              |           | Par        |   | Retained |    | Treasury |  | Comprehensive
|                            |                                                          | Shares       |           | Amount     |   | Value    |    | Earnings |  | Stock         |        | Income
|                            |                                                          |              |           |            |   |          |    |          |  |               |        |       
|Balances, December 31, 2000 |                                                          |              | 9,770,871 |            |   | $        | 12 |          |  | $             | 22,637 |        |  | $ | 23,462 |       |  | $ | (7,037  | )      |   | $ |    |     
|                           
|                           
|                           
|                           
|                            | Comprehensive income:                                    |              |           |            |   |          |    |          |  |               |        |        |  |   |        |       |  |   |         |        |   |   |     |      |  
|                           
|                           
|                           
|                           
|                            | Net Income                                               |              |           |            |   |          |    |          |  |               |        |        |  |   |        | 4,596 |  |   |         |        |   |   |     |      |  
|                           
|                           
|                           
|                           
|                            | Other comprehensive income:                              |              |           |            |   |          |    |          |  |               |        |        |  |   |        |       |  |   |         |        |   |   |     |      |  
|                           
|                           
|                           
|                           
|                            | Cash flow hedge (net of deferred tax expense of
    $19) |              |           |            |   |          |    |          |  |               |        |        |  |   |        |       |  |   |         |        |   |   |     | 27   |  
|                            |                                                          |              |           |            |   |          |    |          |  |               |        |        |  |   |        |       |  |   |         |        |   |   |     |     
|                            | Total comprehensive income                               |              |           |            |   |          |    |          |  |               |        |        |  |   |        |       |  |   |         |        |   |   |     |      |  
|                           
|                           
|                           
|                           
|                            | Issuance of Common Stock                                 |              |           | 39,829     |   |          |    |          |  |               |        | 111    |  |   |        |       |  |   |         |        |   |   |     |      |  
|                           
|                           
|                           
|                           
|                            | Repurchase of Common Stock                               |              |           | (19,500    | ) |          |    |          |  |               |        |        |  |   |        |       |  |   |         | (79    | ) |   |     |      |  
|                           
|                           
|                           
|                           
|                            | Other                                                    |              |           |            |   |          |    |          |  |               |        | 10     |  |   |        |       |  |   |         |        |   |   |     |      |  
|                            |                                                          |              |           |            |   |          |    |          |  |               |        |        |  |   |        |       |  |   |         |        |   |   |     |     
|Balances, December 31, 2001 |                                                          |              | 9,791,200 |            |   |          | 12 |          |  |               | 22,758 |        |  |   | 28,058 |       |  |   | (7,116  | )      |   |   | 27  |     
|                           
|                           
|                           
|                           
|                            | Comprehensive income:                                    |              |           |            |   |          |    |          |  |               |        |        |  |   |        |       |  |   |         |        |   |   |     |      |  
|                           
|                           
|                           
|                           
|                            | Net income                                               |              |           |            |   |          |    |          |  |               |        |        |  |   |        | 6,830 |  |   |         |        |   |   |     |      |  
|                           
|                           
|                           
|                           
|                            | Other comprehensive income:                              |              |           |            |   |          |    |          |  |               |        |        |  |   |        |       |  |   |         |        |   |   |     |      |  
|                           
|                           
|                           
|                           
|                            | Cash flow hedge (net of deferred tax expense of
    $77) |              |           |            |   |          |    |          |  |               |        |        |  |   |        |       |  |   |         |        |   |   |     | (114 | )
|                            |                                                          |              |           |            |   |          |    |          |  |               |        |        |  |   |        |       |  |   |         |        |   |   |     |     
|                            | Total comprehensive income                               |              |           |            |   |          |    |          |  |               |        |        |  |   |        |       |  |   |         |        |   |   |     |      |  
|                           
|                           
|                           
|                           
|                            | Issuance of Common Stock                                 |              |           | 91,843     |   |          |    |          |  |               |        | 353    |  |   |        |       |  |   |         |        |   |   |     |      |  
|                           
|                           
|                           
|                           
|                            | Repurchase of Common Stock                               |              |           | (1,304,743 | ) |          |    |          |  |               |        |        |  |   |        |       |  |   |         | (6,477 | ) |   |     |      |  
|                           
|                           
|                           
|                           
|                            | Other                                                    |              |           | 9,397      |   |          |    |          |  |               |        | 43     |  |   |        |       |  |   |         | 40     |   |   |     |      |  
|                            |                                                          |              |           |            |   |          |    |          |  |               |        |        |  |   |        |       |  |   |         |        |   |   |     |     
|Balances, December 31, 2002 |                                                          |              | 8,587,697 |            |   |          | 12 |          |  |               | 23,154 |        |  |   | 34,888 |       |  |   | (13,553 | )      |   |   | (87 | )   
|                           
|                           
|                           
|                           
|                            | Comprehensive income:                                    |              |           |            |   |          |    |          |  |               |        |        |  |   |        |       |  |   |         |        |   |   |     |      |  
|                           
|                           
|                           
|                           
|                            | Net income                                               |              |           |            |   |          |    |          |  |               |        |        |  |   |        | 5,809 |  |   |         |        |   |   |     |      |  
|                           
|                           
|                           
|                           
|                            | Other comprehensive income:                              |              |           |            |   |          |    |          |  |               |        |        |  |   |        |       |  |   |         |        |   |   |     |      |  
|                           
|                           
|                           
|                           
|                            | Cash flow hedge (net of deferred tax expense of
    $35) |              |           |            |   |          |    |          |  |               |        |        |  |   |        |       |  |   |         |        |   |   |     | 36   |  
|                            |                                                          |              |           |            |   |          |    |          |  |               |        |        |  |   |        |       |  |   |         |        |   |   |     |     
|                            | Total comprehensive income                               |              |           |            |   |          |    |          |  |               |        |        |  |   |        |       |  |   |         |        |   |   |     |      |  
|                           
|                           
|                           
|                           
|                            | Issuance of Common Stock                                 |              |           | 62,347     |   |          |    |          |  |               |        | 266    |  |   |        |       |  |   |         |        |   |   |     |      |  
|                           
|                           
|                           
|                           
|                            | Repurchase of Common Stock                               |              |           | (172,622   | ) |          |    |          |  |               |        |        |  |   |        |       |  |   |         | (902   | ) |   |     |      |  
|                           
|                           
|                           
|                           
|                            | Other                                                    |              |           | (523       | ) |          |    |          |  |               |        | 45     |  |   |        |       |  |   |         | (4     | ) |   |     |      |  
|                            |                                                          |              |           |            |   |          |    |          |  |               |        |        |  |   |        |       |  |   |         |        |   |   |     |     
|Balances, December 31, 2003 |                                                          |              | 8,476,899 |            |   | $        | 12 |          |  | $             | 23,465 |        |  | $ | 40,697 |       |  | $ | (14,459 | )      |   | $ | (51 | )   
|                            |                                                          |              |           |            |   |          |    |          |  |               |        |        |  |   |        |       |  |   |         |        |   |   |     |     

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                            |                                                          |              |     |       |   |       |      |     |   |   |        |        |  
|--------------------------- | -------------------------------------------------------- | ------------ | --- | ----- | - | ----- | ---- | --- | - | - | ------ | ------ | -
|                            |                                                          | Unearned     |     |       |   |      
|                            |                                                          | Compensation |     | Other |   | Total
|                            |                                                          |              |     |       |   |      
|Balances, December 31, 2000 |                                                          | $            |    |       |   | $     | (912 | )   |   | $ | 38,162 |       
|                           
|                           
|                           
|                           
|                            | Comprehensive income:                                    |              |     |       |   |       |      |     |   |   |        |        |  
|                           
|                           
|                           
|                           
|                            | Net Income                                               |              |     |       |   |       |      |     |   |   |        | 4,596  |  
|                           
|                           
|                           
|                           
|                            | Other comprehensive income:                              |              |     |       |   |       |      |     |   |   |        |        |  
|                           
|                           
|                           
|                           
|                            | Cash flow hedge (net of deferred tax expense of
    $19) |              |     |       |   |       |      |     |   |   |        | 27     |  
|                            |                                                          |              |     |       |   |       |      |     |   |   |        |       
|                            | Total comprehensive income                               |              |     |       |   |       |      |     |   |   |        | 4,623  |  
|                           
|                           
|                           
|                           
|                            | Issuance of Common Stock                                 |              |     |       |   |       |      |     |   |   |        | 111    |  
|                           
|                           
|                           
|                           
|                            | Repurchase of Common Stock                               |              |     |       |   |       |      |     |   |   |        | (79    | )
|                           
|                           
|                           
|                           
|                            | Other                                                    |              |     |       |   |       |      | (61 | ) |   |        | (51    | )
|                            |                                                          |              |     |       |   |       |      |     |   |   |        |       
|Balances, December 31, 2001 |                                                          |              |    |       |   |       | (973 | )   |   |   | 42,766 |       
|                           
|                           
|                           
|                           
|                            | Comprehensive income:                                    |              |     |       |   |       |      |     |   |   |        |        |  
|                           
|                           
|                           
|                           
|                            | Net income                                               |              |     |       |   |       |      |     |   |   |        | 6,830  |  
|                           
|                           
|                           
|                           
|                            | Other comprehensive income:                              |              |     |       |   |       |      |     |   |   |        |        |  
|                           
|                           
|                           
|                           
|                            | Cash flow hedge (net of deferred tax expense of
    $77) |              |     |       |   |       |      |     |   |   |        | (114   | )
|                            |                                                          |              |     |       |   |       |      |     |   |   |        |       
|                            | Total comprehensive income                               |              |     |       |   |       |      |     |   |   |        | 6,716  |  
|                           
|                           
|                           
|                           
|                            | Issuance of Common Stock                                 |              |     |       |   |       |      |     |   |   |        | 353    |  
|                           
|                           
|                           
|                           
|                            | Repurchase of Common Stock                               |              |     |       |   |       |      |     |   |   |        | (6,477 | )
|                           
|                           
|                           
|                           
|                            | Other                                                    |              |     | (39   | ) |       |      | 47  |   |   |        | 91     |  
|                            |                                                          |              |     |       |   |       |      |     |   |   |        |       
|Balances, December 31, 2002 |                                                          |              | (39 | )     |   |       | (926 | )   |   |   | 43,449 |       
|                           
|                           
|                           
|                           
|                            | Comprehensive income:                                    |              |     |       |   |       |      |     |   |   |        |        |  
|                           
|                           
|                           
|                           
|                            | Net income                                               |              |     |       |   |       |      |     |   |   |        | 5,809  |  
|                           
|                           
|                           
|                           
|                            | Other comprehensive income:                              |              |     |       |   |       |      |     |   |   |        |        |  
|                           
|                           
|                           
|                           
|                            | Cash flow hedge (net of deferred tax expense of
    $35) |              |     |      |   |       |      |     |   |   |        | 36     |  
|                            |                                                          |              |     |       |   |       |      |     |   |   |        |       
|                            | Total comprehensive income                               |              |     |       |   |       |      |     |   |   |        | 5,845  |  
|                           
|                           
|                           
|                           
|                            | Issuance of Common Stock                                 |              |     |       |   |       |      |     |   |   |        | 266    |  
|                           
|                           
|                           
|                           
|                            | Repurchase of Common Stock                               |              |     |       |   |       |      |     |   |   |        | (902   | )
|                           
|                           
|                           
|                           
|                            | Other                                                    |              |     | 11    |   |       |      | (62 | ) |   |        | (10    | )
|                            |                                                          |              |     |       |   |       |      |     |   |   |        |       
|Balances, December 31, 2003 |                                                          | $            | (28 | )     |   | $     | (988 | )   |   | $ | 48,648 |       
|                            |                                                          |              |     |       |   |       |      |     |   |   |        |       

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

44



---



##### Table of Contents



TROVER SOLUTIONS, INC.

STATEMENTS OF CASH FLOWS

For the years ended December 31, 2003, 2002 and 2001


(Dollars in thousands)


|                                                         |                                                                                       |                        |                                                         |        |       |        |       |        |       |         |       |        |        |        |  
|-------------------------------------------------------- | ------------------------------------------------------------------------------------- | ---------------------- | ------------------------------------------------------- | ------ | ----- | ------ | ----- | ------ | ----- | ------- | ----- | ------ | ------ | ------ | -
|                                                         |                                                                                       | 2003                   |                                                         | 2002   |       | 2001  
|                                                         |                                                                                       |                        |                                                         |        |       |       
|Cash flows from operating activities:                    |                                                                                       |                        |                                                         |        |       |        |       |        |       |         |       |       
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Net income                                                                            |                        | $                                                       | 5,809  |       |        | $     | 6,830  |       |         | $     | 4,596  |       
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Adjustments to reconcile net income to net cash
    provided by operating activities: |                        |                                                         |        |       |        |       |        |       |         |       |        |       
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Depreciation and amortization                                                         |                        |                                                         | 4,193  |       |        |       | 5,212  |       |         |       | 6,701  |       
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Deferred income taxes                                                                 |                        |                                                         | 609    |       |        |       | 894    |       |         |       | 1,449  |       
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Other                                                                                 |                        |                                                         | 44     |       |        |       | (96    | )     |         |       | 37     |       
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Loss on disposal of assets                                                            |                        |                                                         |       |       |        |       |       |       |         |       | 1,010  |       
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Changes in operating assets and liabilities:                                          |                        |                                                         |        |       |        |       |        |       |         |       |        |       
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         |                                                                                       | Restricted cash        |                                                         |        | 737   |        |       |        | 271   |         |       |        | (1,384 | )     
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         |                                                                                       | Accounts receivable    |                                                         |        | 2,396 |        |       |        | (7    | )       |       |        | (1,722 | )     
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         |                                                                                       | Other current assets   |                                                         |        | (846  | )      |       |        | (562  | )       |       |        | (282   | )     
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         |                                                                                       | Other assets           |                                                         |        | 6     |        |       |        | (376  | )       |       |        | (970   | )     
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         |                                                                                       | Trade accounts payable |                                                         |        | (403  | )      |       |        | 345   |         |       |        | 77     |       
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         |                                                                                       | Accrued expenses       |                                                         |        | (882  | )      |       |        | 2,056 |         |       |        | (3,095 | )     
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         |                                                                                       | Funds due clients      |                                                         |        | (349  | )      |       |        | (508  | )       |       |        | 439    |       
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         |                                                                                       | Income taxes payable   |                                                         |        | 273   |        |       |        | 154   |         |       |        | (1,085 | )     
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         |                                                                                       | Other liabilities      |                                                         |        | 540   |        |       |        | (489  | )       |       |        | 181    |       
|                                                         |                                                                                       |                        |                                                         |        |       |        |       |        |       |         |       |       
|                                                         |                                                                                       |                        | Net cash provided by operating activities               |        |       | 12,127 |       |        |       | 13,724  |       |        |        | 5,952  |  
|                                                         |                                                                                       |                        |                                                         |        |       |        |       |        |       |         |       |       
|Cash flows from investing activities:                    |                                                                                       |                        |                                                         |        |       |        |       |        |       |         |       |       
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Acquisitions, net of cash acquired                                                    |                        |                                                         |       |       |        |       |       |       |         |       | 2,551  |       
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Purchases of property and equipment                                                   |                        |                                                         | (1,468 | )     |        |       | (2,000 | )     |         |       | (2,004 | )     
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Capitalization of internally developed software                                       |                        |                                                         | (1,037 | )     |        |       | (1,925 | )     |         |       | (1,831 | )     
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Disposals of property and equipment                                                   |                        |                                                         |       |       |        |       |       |       |         |       | 2,611  |       
|                                                         |                                                                                       |                        |                                                         |        |       |        |       |        |       |         |       |       
|                                                         |                                                                                       |                        | Net cash (used in) provided by investing
    activities |        |       | (2,505 | )     |        |       | (3,925  | )     |        |        | 1,327  |  
|                                                         |                                                                                       |                        |                                                         |        |       |        |       |        |       |         |       |       
|Cash flows from financing activities:                    |                                                                                       |                        |                                                         |        |       |        |       |        |       |         |       |       
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Issuance of common stock                                                              |                        |                                                         | 247    |       |        |       | 353    |       |         |       | 111    |       
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Repurchase of common stock                                                            |                        |                                                         | (902   | )     |        |       | (6,477 | )     |         |       | (79    | )     
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Line of credit proceeds                                                               |                        |                                                         |       |       |        |       | 800    |       |         |       | 1,500  |       
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Line of credit repayments                                                             |                        |                                                         |       |       |        |       | (4,800 | )     |         |       | (7,500 | )     
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Other                                                                                 |                        |                                                         | (62    | )     |        |       | 47     |       |         |       | (61    | )     
|                                                         |                                                                                       |                        |                                                         |        |       |        |       |        |       |         |       |       
|                                                         |                                                                                       |                        | Net cash used in financing activities                   |        |       | (717   | )     |        |       | (10,077 | )     |        |        | (6,029 | )
|                                                         |                                                                                       |                        |                                                         |        |       |        |       |        |       |         |       |       
|Net increase (decrease) in cash and cash
    equivalents |                                                                                       |                        | 8,905                                                   |        |       |        | (278  | )      |       |         | 1,250 |       
|                                                        
|                                                        
|                                                        
|                                                        
|Cash and cash equivalents, beginning of period           |                                                                                       |                        | 2,269                                                   |        |       |        | 2,547 |        |       |         | 1,297 |       
|                                                         |                                                                                       |                        |                                                         |        |       |        |       |        |       |         |       |       
|Cash and cash equivalents, end of period                 |                                                                                       | $                      | 11,174                                                  |        |       | $      | 2,269 |        |       | $       | 2,547 |       
|                                                         |                                                                                       |                        |                                                         |        |       |        |       |        |       |         |       |       
|Supplemental cash flows disclosure:                      |                                                                                       |                        |                                                         |        |       |        |       |        |       |         |       |       
|                                                        
|                                                        
|                                                        
|                                                        
|Income tax payments                                      |                                                                                       | $                      | 3,099                                                   |        |       | $      | 3,341 |        |       | $       | 1,734 |       
|                                                         |                                                                                       |                        |                                                         |        |       |        |       |        |       |         |       |       
|Cash paid for interest expense                           |                                                                                       | $                      | 423                                                     |        |       | $      | 471   |        |       | $       | 1,073 |       
|                                                         |                                                                                       |                        |                                                         |        |       |        |       |        |       |         |       |       

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

45



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##### Table of Contents



TROVER SOLUTIONS, INC.

NOTES TO FINANCIAL STATEMENTS

1. ORGANIZATION AND BASIS OF PRESENTATION

Trover Solutions, Inc., a Delaware corporation (the
Company), 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), (2) the recovery of
overpayments attributable to duplicate payments, failures to
coordinate benefits and similar errors in payment
(overpayments), and (3) the auditing of
physician evaluation and management claims for consistency with
medical records, in accordance with federal guidelines (MD
Audit).

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Cash, Cash Equivalents and Restricted Cash

Cash and cash equivalents include cash, demand deposits and
highly liquid investments with an original maturity of three
months or less. Carrying values of cash and cash equivalents
approximate fair value due to the short-term nature of the
instruments.

Restricted cash represents the balance in client-specific bank
accounts of amounts collected on behalf of certain clients. A
portion of the balance will be disbursed to clients in
accordance with the terms of the contracts between the Company
and its clients, while the remainder will be released to the
Company in payment of its fees.

Substantially all of the Companys cash, cash equivalents
and restricted cash have been placed with one financial
institution.

Fair Value of Financial Instruments

The financial instruments of the Company consist mainly of cash
and cash equivalents, trade receivables, short-term debt and
long-term debt. The fair value of cash and cash equivalents,
trade receivables and short-term debt approximates their
carrying values due to the relatively short-term nature of the
instruments. The fair value of long-term debt is based on
current rates available to the Company for debt with similar
characteristics.

Property and Equipment

Property and equipment are recorded at cost. Depreciation is
provided using the straight-line method over the estimated
useful lives of the respective assets. Estimated useful lives of
property and equipment are as follows:

|                       |  |  |           | 
|---------------------- |  |  | --------- | 
|                      
|                      
|                      
|                      
|Furniture and fixtures |  |  | 3-5 Years | 
|                      
|                      
|                      
|                      
|Office equipment       |  |  | 3-5 Years | 
|                      
|                      
|                      
|                      
|Computer equipment     |  |  | 3-5 Years | 
|                      
|                      
|                      
|                      
|Software               |  |  | 3-5 Years | 
|                      
|                      
|                      
|                      
|Leasehold improvements |  |  | 5-7 Years | 

46



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##### Table of Contents



TROVER SOLUTIONS, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)

Depreciation expense for the years ended 2003, 2002 and 2001 was
$3.1 million, $4.1 million, and $4.0 million,
respectively.

Intangible Assets

Goodwill represented the unamortized excess of cost over the
fair value of tangible and identifiable intangible assets
acquired and was amortized on a straight-line basis over twenty
years through December 31, 2001. Effective January 1,
2002, the Company adopted FAS 142 under which goodwill is
no longer amortized but instead is assessed for impairment at
least annually. See Note 7, Goodwill and Other
Intangible Assets. Identifiable intangible assets are
being amortized on a straight-line basis over varying periods,
ranging from four to fifteen years. Amortization expense for the
years ended 2003, 2002 and 2001 was $1.1 million,
$1.1 million, and $2.7 million, respectively.

Revenue Recognition

Revenues for the Healthcare Recovery Services segment are
generally derived from contingent fee arrangements whereby the
Company receives a percentage of the amount successfully
recovered on behalf of its clients. Subrogation revenues and the
related receivables are recognized when a fee is earned based on
settlement of the case. A case is deemed settled when the
Company can confirm that the parties agree on all material terms
associated with the settlement. Revenues and the related
receivables for provider bill audit, overpayment and physician
audit recovery services are generally recognized upon completion
of the audit or identification of the overpayment in accordance
with client contract terms.

Revenues for the Property and Casualty Recovery Services segment
are generally derived from contingent fee arrangements whereby
the Company receives a percentage of the amount successfully
recovered on behalf of its clients. These revenues and the
related receivables are recognized when a fee is earned upon
receipt of recoveries on a cash basis.

The Software segment provides software to clients in an
application service provider model. As such, revenues are
recognized at the time the application is provided to the client.

The Company establishes an allowance for doubtful accounts to
reduce its receivables to their net realizable value. The
allowances are estimated by management based on general factors
such as the aging of the receivables and historical collection
experience.

In December 2003, the Securities and Exchange Commission
issued Staff Accounting Bulletin No. 104, Revenue
Recognition (SAB 104) which superseded Staff
Accounting Bulletin No. 101, Revenue Recognition in
Financial Statements (SAB 101). SAB 104s
primary purpose was to rescind accounting guidance contained in
SAB 101 related to multiple element revenue arrangements
which was superseded as a result of the issuance of
EITF 00-21, Accounting for Revenue Arrangements with
Multiple Deliverables. EITF 00-21 was effective for
revenue arrangements entered into in fiscal periods beginning
after June 15, 2003. The adoption of EITF 00-21 did
not have a significant impact on the Companys financial
statements. The Company was previously following the
requirements provided under SAB 104 and, accordingly, the
implementation of this pronouncement had no impact on the
Companys financial position or results of operations for
2003, 2002 or 2001.

Research and Development

During 2000, the Company began research and development
activities in connection with the creation of new products for
the insurance industry. The Company charges all research and
development costs to expense when incurred. The Company incurred
$537,000 of expenses related to research and development during
2001 and no such expenses in 2003 or 2002.

47



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##### Table of Contents



TROVER SOLUTIONS, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)

Provision for Income Taxes

The provision for income taxes has been prepared in accordance
with the provisions of Statement of Financial Accounting
Standards (SFAS) No. 109, Accounting for Income
Taxes. The Company recognizes an asset or liability for
the deferred tax consequences of temporary differences between
the tax bases of assets and liabilities and their reported
amounts in the financial statements. A valuation allowance is
provided against these deferred tax assets if it is more likely
than not that some portion or all of the deferred tax assets
will not be realized.

Stock Based Compensation Plans

In December 2002, the FASB issued SFAS No. 148,
Accounting for Stock-Based Compensation 
Transition and Disclosure  an Amendment of
SFAS 123 which provides alternative methods for a
voluntary change to the fair value method of accounting for
stock-based compensation and amends the disclosure requirements
of SFAS 123. The Company has elected to continue to account
for its stock-based compensation plans under Accounting
Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees (APB No. 25), and related
interpretations. The following disclosures are provided in
accordance with SFAS 148.

The Company has various stock-based compensation plans, which
are described in Note 12. No stock-based employee
compensation cost is reflected in net income as all options
granted under those plans had an exercise price equal to the
market value of the underlying Common Stock on the date of
grant. The following table illustrates the effect on net income
and earnings per share if the Company had applied the fair value
recognition provisions of SFAS No. 123. Accounting
for Stock-Based Compensation to stock-based employee
compensation (dollars in thousands, except per share results):

|                                                                                                                                                  |  |      |       |      |  |      |       |   |  |   |        |  
|------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ----- | ---- |  | ---- | ----- | - |  | - | ------ | -
|                                                                                                                                                  |  | 2003 |       | 2002 |  | 2001
|                                                                                                                                                  |  |      |       |      |  |     
|Net income as reported                                                                                                                            |  | $    | 5,809 |      |  | $    | 6,830 |   |  | $ | 4,596  |  
|                                                                                                                                                 
|                                                                                                                                                 
|                                                                                                                                                 
|                                                                                                                                                 
|Less: total stock-based employee compensation
    expense determined under fair value based method for all awards,
    net of related tax effects |  |      | (303  | )    |  |      | (799  | ) |  |   | (1,323 | )
|                                                                                                                                                  |  |      |       |      |  |      |       |   |  |   |        |  
|Pro forma net income                                                                                                                              |  | $    | 5,506 |      |  | $    | 6,031 |   |  | $ | 3,273  |  
|                                                                                                                                                  |  |      |       |      |  |      |       |   |  |   |        |  
|Earnings per common share:                                                                                                                        |  |      |       |      |  |      |       |   |  |   |        |  
|                                                                                                                                                 
|                                                                                                                                                 
|                                                                                                                                                 
|                                                                                                                                                 
|As reported (basic)                                                                                                                               |  | $    | 0.69  |      |  | $    | 0.74  |   |  | $ | 0.47   |  
|                                                                                                                                                 
|                                                                                                                                                 
|                                                                                                                                                 
|                                                                                                                                                 
|As reported (diluted)                                                                                                                             |  |      | 0.66  |      |  |      | 0.72  |   |  |   | 0.46   |  
|                                                                                                                                                 
|                                                                                                                                                 
|                                                                                                                                                 
|                                                                                                                                                 
|Pro forma (basic)                                                                                                                                 |  |      | 0.65  |      |  |      | 0.65  |   |  |   | 0.33   |  
|                                                                                                                                                 
|                                                                                                                                                 
|                                                                                                                                                 
|                                                                                                                                                 
|Pro forma (diluted)                                                                                                                               |  |      | 0.63  |      |  |      | 0.64  |   |  |   | 0.33   |  

The effects of applying SFAS No. 123 in the pro forma
disclosures are not likely to be representative of the effects
on pro forma net income or earnings per common share for future
years because variables such as option grants, option exercises,
and stock price volatility included in the disclosures may not
be indicative of actual future activity.

48



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##### Table of Contents



TROVER SOLUTIONS, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)

Earnings per Common Share

A reconciliation of the numerators and denominators of the basic
and diluted earnings per common share calculations follows
(dollars in thousands, except per share results):

|                              |                                   |            |   |        |  |           |  |           |  |  |   |       |  
|----------------------------- | --------------------------------- | ---------- | - | ------ |  | --------- |  | --------- |  |  | - | ----- | -
|                              |                                   |            |   |        |  | Per-Share
|                              |                                   | Net Income |   | Shares |  | Results  
|                              |                                   |            |   |        |  |          
|Year ended December 31, 2003: |                                   |            |   |        |  |           |  |           |  |  |   |      
|                             
|                             
|                             
|                             
|                              | Basic earnings per common share   |            | $ | 5,809  |  |           |  | 8,455,213 |  |  | $ | 0.69  |  
|                             
|                             
|                             
|                             
|                              | Effect of dilutive stock options  |            |   |       |  |           |  | 303,131   |  |  |   | (0.03 | )
|                             
|                             
|                             
|                             
|                              | Diluted earnings per common share |            |   | 5,809  |  |           |  | 8,758,344 |  |  |   | 0.66  |  
|                             
|                             
|                             
|                             
|Year ended December 31, 2002: |                                   |            |   |        |  |           |  |           |  |  |   |      
|                             
|                             
|                             
|                             
|                              | Basic earnings per common share   |            |   | 6,830  |  |           |  | 9,223,183 |  |  |   | 0.74  |  
|                             
|                             
|                             
|                             
|                              | Effect of dilutive stock options  |            |   |       |  |           |  | 254,199   |  |  |   | (0.02 | )
|                             
|                             
|                             
|                             
|                              | Diluted earnings per common share |            |   | 6,830  |  |           |  | 9,477,382 |  |  |   | 0.72  |  
|                             
|                             
|                             
|                             
|Year ended December 31, 2001: |                                   |            |   |        |  |           |  |           |  |  |   |      
|                             
|                             
|                             
|                             
|                              | Basic earnings per common share   |            |   | 4,596  |  |           |  | 9,794,343 |  |  |   | 0.47  |  
|                             
|                             
|                             
|                             
|                              | Effect of dilutive stock options  |            |   |       |  |           |  | 160,447   |  |  |   | (0.01 | )
|                             
|                             
|                             
|                             
|                              | Diluted earnings per common share |            |   | 4,596  |  |           |  | 9,954,790 |  |  |   | 0.46  |  

Basic earnings per common share were computed based on the
weighted-average number of shares outstanding during the year.
The dilutive effect of stock options is calculated using the
treasury stock method. Options to purchase 890,252, 947,834 and
1,298,653 shares for the years ended December 31, 2003,
2002 and 2001, respectively, were not included in the
computation of diluted earnings per common share because the
exercise prices of these options were greater than the average
market price of the common shares during the respective years,
and therefore, the effect would have been antidilutive.

Derivatives

The Company accounts for derivative instruments in accordance
with Statement of Financial Accounting Standards No. 133,
Accounting for Derivative Instruments and Hedging
Activities (SFAS 133), as amended by Statement of
Financial Account Standard No 138, Accounting for
Certain Derivative Instruments and Certain Hedging
Activities  an Amendment of FAS 133 and by
Statement of Financial Accounting Standards No. 149,
Amendment of Statement 133 on Derivative Instruments
and Hedging Activities. SFAS 133 requires that all
derivatives, including interest rate swap agreements, be
recognized on the balance sheet at their fair value. Derivatives
that are not hedges must be recorded at fair value through
earnings. If a derivative is a hedge, depending on the nature of
the hedge, changes in the fair value of the derivative are
either offset against the change in fair value of the underlying
assets or liabilities through earnings or recognized in other
comprehensive income until the underlying hedge item is
recognized in earnings. The ineffective portion of a
derivatives change in fair value is to be immediately
recognized in earnings. See Note 10 Derivatives.

Other Comprehensive Income (Loss)

Other comprehensive income (loss) refers to revenues,
expenses, gains and losses that under accounting principles
generally accepted in the United States of America are included
in comprehensive income (loss) but are excluded from net
income as these amounts are recorded directly as an adjustment
to stockholders equity, net of tax. The Companys
other comprehensive income is composed of a deferred gains and
losses on a cash flow hedge related to the Companys
interest rate swap agreement. See Note 10
Derivatives.

49



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##### Table of Contents



TROVER SOLUTIONS, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)

Segment Information

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

Effective January 1, 2002, the Company has three segments
which qualify as reportable segments based on qualitative
guidelines. The segments include: Healthcare Recovery Services,
Property and Casualty Recovery Services and Software. Prior to
that date, the Company reported one segment which was Healthcare
Services. The Company did not have any products or services
which met the quantitative or qualitative guidelines for segment
reporting prior to January 1, 2002.

Recently Issued Accounting Pronouncements

In November 2002, the FASB issued Emerging Issues Task Force
Issue (EITF) 00-21, Accounting for Revenue
Arrangements with Multiple Deliverables which addresses
revenue recognition accounting by a vendor for arrangements
under which it will perform multiple revenue-generating
activities. The provisions of this statement are effective for
revenue arrangements entered into in fiscal periods beginning
after June 15, 2003. The adoption of EITF 00-21 did
not have a significant impact on the Companys financial
statements.

In January 2003, the FASB issued FASB Interpretation
(FIN) 46, Consolidation of Variable Interest
Entities, an Interpretation of ARB No. 51.
FIN 46 requires certain variable interest entities to be
consolidated by the primary beneficiary of the entity if the
equity investors in the entity do not have the characteristics
of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties.
FIN 46 is effective for all new variable interest entities
created or acquired after January 31, 2003. For variable
interest entities created or acquired prior to February 1,
2003, the provisions of FIN 46 must be applied for the
first interim or annual period beginning after June 15,
2003. The Company does not have any variable interest entities
as defined under FIN 46.

In April 2003, the FASB issued SFAS 149, Amendment of
Statement 133 on Derivative Instruments and Hedging
Activities which amends and clarifies the accounting
guidance on derivative instruments and hedging activities that
fall within the scope of SFAS 133, Accounting for
Derivative Instruments and Hedging Activities.
SFAS 149 is effective (1) for contracts entered into
or modified after June 30, 2003, with certain exceptions,
and (2) for hedging relationships designated after
June 30, 2003. The Company will apply the provisions of
SFAS 149 to future contracts entered into or future hedging
relationships.

In May 2003, the FASB issued SFAS 150, Accounting for
Certain Financial Instruments with Characteristics of both
Liabilities and Equity which establishes standards for how
an issuer classifies and measures certain financial instruments
with characteristics of both liabilities and equity.
SFAS 150 is effective for financial instruments entered
into or modified after May 31, 2003, and otherwise was
effective for the Company on July 1, 2003. The adoption of
SFAS 150 did not have a significant impact on the
Companys financial statements.

In December 2003, the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 104, Revenue
Recognition (SAB 104) which superceded Staff
Accounting Bulletin No. 101, Revenue Recognition in
Financial Statements (SAB 101). SAB 104s
primary purpose was to rescind accounting guidance contained in
SAB 101 related to multiple element revenue arrangements
which was superceded as a result of the issuance of
EITF 00-21, Accounting for Revenue Arrangements with
Multiple Deliverables.

50



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##### Table of Contents



TROVER SOLUTIONS, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)

EITF 00-21 was effective for revenue arrangements entered
into in fiscal periods beginning after June 15, 2003. The
adoption of EITF 00-21 did not have a significant impact on
the Companys financial statements. The Company was
previously following the requirements provided under
SAB 104 and, accordingly, the implementation of this
pronouncement had no impact on the Companys financial
position or results of operations as reported.

In December 2003, the FASB issued FIN 46-R,
Consolidation of Variable Interest Entities  an
interpretation of ARB 51 (revised December 2003),
which replaces FIN 46. FIN 46-R incorporates certain
modifications to FIN 46 adopted by FASB subsequent to the
issuance of FIN 46, including modifications of the scope of
FIN 46. For all non-special purposes entities
(SPE) created prior to February 1, 2003, public
entities will be required to adopt FIN 46-R at the end of
the first interim or annual reporting period ending after
March 15, 2004. For all entities (regardless of whether the
entity is an SPE) that were created subsequent to
January 31, 2003, public entities are already required to
apply the provisions of FIN 46, and should continue doing so
unless they elect to early adopt the provisions of Fin 46-R
as of the first interim or annual reporting period ending after
December 15, 2003. If they do not elect to early adopt
FIN 46-R, public entities would be required to apply
FIN 46-R to those post-January 31, 2003 entities as of
the end of the first interim or annual reporting period ending
after March 15, 2004. Management will need to review and
assess the effects, if any, FIN 46-R will have on the
Companys financial statements.

Use of Estimates and Assumptions

Preparation of the Companys financial statements in
conformity with accounting principles generally accepted in the
United States of America requires management to make estimates
and assumptions. These estimates and assumptions affect
(i) reported amounts of assets and liabilities,
(ii) disclosure of contingent assets and liabilities at the
date of the financial statements and (iii) reported amounts
of revenues and expenditures during the reporting period. Actual
results may differ from those estimates.

3. INCOME TAXES

In September 2001, the Company concluded that, in light of the
passage of time with respect to the filing of the Companys
income tax returns for years up to and including 1997, it was
proper to reverse previously accrued taxes by reducing the tax
provision for the year ended December 31, 2001 by $681,000,
net. 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 be required.

The provision (benefit) for income taxes for the years
ended December 31, 2003, 2002 and 2001 consists of the
following (in thousands):

|          |                 |      |       |       |  |      |       |       |  |   |       |       | 
|--------- | --------------- | ---- | ----- | ----- |  | ---- | ----- | ----- |  | - | ----- | ----- | 
|          |                 | 2003 |       | 2002  |  | 2001
|          |                 |      |       |       |  |     
|Current:  |                 |      |       |       |  |      |       |       |  |   |       |      
|         
|         
|         
|         
|          | Federal         |      | $     | 2,712 |  |      | $     | 2,588 |  |   | $     | 486   | 
|         
|         
|         
|         
|          | State and local |      |       | 552   |  |      |       | 758   |  |   |       | 162   | 
|          |                 |      |       |       |  |      |       |       |  |   |       |      
|          |                 |      | 3,264 |       |  |      | 3,346 |       |  |   | 648   |      
|          |                 |      |       |       |  |      |       |       |  |   |       |      
|Deferred: |                 |      |       |       |  |      |       |       |  |   |       |      
|         
|         
|         
|         
|          | Federal         |      |       | 506   |  |      |       | 762   |  |   |       | 1,091 | 
|         
|         
|         
|         
|          | State and local |      |       | 103   |  |      |       | 132   |  |   |       | 358   | 
|          |                 |      |       |       |  |      |       |       |  |   |       |      
|          |                 |      | 609   |       |  |      | 894   |       |  |   | 1,449 |      
|          |                 |      |       |       |  |      |       |       |  |   |       |      
|          |                 | $    | 3,873 |       |  | $    | 4,240 |       |  | $ | 2,097 |      
|          |                 |      |       |       |  |      |       |       |  |   |       |      

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TROVER SOLUTIONS, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)

The following is a reconciliation of the effective tax rate to
the federal statutory rate for the years ended December 31,
2003, 2002 and 2001:

|                                                                                      |  |      |      |      |  |      |      |   |  |  |       |  
|------------------------------------------------------------------------------------- |  | ---- | ---- | ---- |  | ---- | ---- | - |  |  | ----- | -
|                                                                                      |  | 2003 |      | 2002 |  | 2001
|                                                                                      |  |      |      |      |  |     
|Federal statutory rate                                                                |  |      | 34.0 | %    |  |      | 34.0 | % |  |  | 34.0  | %
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|State and local taxes, net of federal tax benefit                                     |  |      | 4.9  |      |  |      | 5.9  |   |  |  | 6.9   |  
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|Research and experimental tax credit                                                  |  |      |     |      |  |      | (2.2 | ) |  |  |      |  
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|Reversal of previously accrued income taxes for
    1997 non-cash compensation charge |  |      |     |      |  |      |     |   |  |  | (10.2 | )
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|Other, net                                                                            |  |      | 1.1  |      |  |      | 0.6  |   |  |  | 0.6   |  
|                                                                                      |  |      |      |      |  |      |      |   |  |  |       |  
|                                                                                      |  |      | 40.0 | %    |  |      | 38.3 | % |  |  | 31.3  | %
|                                                                                      |  |      |      |      |  |      |      |   |  |  |       |  

Temporary differences giving rise to deferred taxes in the
accompanying balance sheets at December 31, 2003 and 2002
consist of the following (in thousands):

|                               |  |        |       |             |  |        |       |             |  |   |       |  |  |   |       | 
|------------------------------ |  | ------ | ----- | ----------- |  | ------ | ----- | ----------- |  | - | ----- |  |  | - | ----- | 
|                               |  |        |       |            
|                               |  | 2003   |       | 2002       
|                               |  |        |       |            
|                               |  | Assets |       | Liabilities |  | Assets |       | Liabilities
|                               |  |        |       |             |  |        |       |            
|Accrued bonuses                |  | $      | 486   |             |  |        |       |             |  | $ | 249   |  |  |   |       | 
|                              
|                              
|                              
|                              
|Accounts receivable            |  |        |       |             |  | $      | 1,650 |             |  |   |       |  |  | $ | 1,777 | 
|                              
|                              
|                              
|                              
|Accrued litigation             |  |        | 544   |             |  |        |       |             |  |   | 441   |  |  |   |       | 
|                              
|                              
|                              
|                              
|Provision for health insurance |  |        |       |             |  |        |       |             |  |   | 218   |  |  |   |       | 
|                              
|                              
|                              
|                              
|Property and equipment         |  |        |       |             |  |        | 554   |             |  |   |       |  |  |   | 543   | 
|                              
|                              
|                              
|                              
|Intangible assets              |  |        |       |             |  |        | 2,389 |             |  |   |       |  |  |   | 1,514 | 
|                              
|                              
|                              
|                              
|Accrued vacation               |  |        | 292   |             |  |        |       |             |  |   | 292   |  |  |   |       | 
|                              
|                              
|                              
|                              
|Deferred rent                  |  |        | 333   |             |  |        |       |             |  |   | 331   |  |  |   |       | 
|                              
|                              
|                              
|                              
|Cash flow hedge                |  |        | 34    |             |  |        |       |             |  |   | 58    |  |  |   |       | 
|                              
|                              
|                              
|                              
|Other                          |  |        | 48    |             |  |        |       |             |  |   | 22    |  |  |   |       | 
|                               |  |        |       |             |  |        |       |             |  |   |       |  |  |   |       | 
|                               |  | $      | 1,737 |             |  | $      | 4,593 |             |  | $ | 1,611 |  |  | $ | 3,834 | 
|                               |  |        |       |             |  |        |       |             |  |   |       |  |  |   |       | 

Management believes that the deferred tax assets are realizable
based primarily on the existence of sufficient taxable income
within the allowable carryback period. Accordingly, management
has determined that no valuation allowance is necessary.

4. CONCENTRATION OF CREDIT RISK

UnitedHealth Group (UHG), a terminated client,
accounted for 24%, 28% and 27% of the Companys total
revenues for the years ended December 31, 2003, 2002, and
2001, respectively. Wellpoint Health Network Inc.
(Wellpoint) accounted for 17%, 14% and 11% of the
Companys total revenues for the years ended
December 31, 2003, 2002 and 2001, respectively. No other
client accounted for more than 10% of the Companys total
revenues. The loss of Wellpoint could have a material adverse
effect on the Companys results of operations, financial
position and cash flows.

Wellpoint, which accounted for 72% and 65% of the Companys
revenue from its provider bill audit product in 2003 and 2002,
respectively accounted for 30% and 32% of the Companys
accounts receivable balance at December 31, 2003 and 2002,
respectively. In addition, HealthNet, which accounted for 22%
and 30% of the revenue from the provider bill audit product in
2003 and 2002, respectively, accounted for 10% and 15% of the
Companys accounts receivable balance at December 31,
2003 and 2002, respectively. Should a substantial portion of the
current balance of either of these accounts receivable balances
become uncollectible, it could have a material adverse effect on
the Companys results of operations and cash flows. No
other client accounted for 10% or more of accounts receivable at
December 31, 2003 or 2002.

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TROVER SOLUTIONS, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)

During 2002, UHG management informed the Company of its
intention to terminate subrogation services with respect to all
but 1.8 million lives of the 9.7 million lives then
subject to the Companys services under a contract with
UHG. UHGs termination of these services resulted from its
decision to bring subrogation recovery services back inside UHG,
where they are being performed by its Ingenix strategic business
unit. The Companys contract with UHG expired in accordance
with its terms on February 1, 2003, except with respect to
the 1.8 million lives. In December 2003, UHG gave notice of
the termination of the remaining business under contract,
effective February 1, 2004. The Company expects to continue
recovering on the backlog as to which UHG terminated the
Companys services, a process that the Company expects will
be completed in 5 to 6 years from the dates of termination.

5. RELATED PARTY TRANSACTIONS

The Company has a contract for legal services with a
professional service corporation, Sharps & Associates,
PSC, an entity owned solely by one of the Companys
officers, Douglas R. Sharps. This arrangement exists solely for
the benefit of the Company. 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
benefits from his ownership of the firm. All payments to
Sharps & Associates, PSC are reviewed and approved by
the Audit Committee of the Companys Board of Directors.
For the years ended December 31, 2003, 2002 and 2001,
approximately $3.4 million, $3.3 million and
$3.4 million, respectively, was paid to this law firm for
such legal services, including all employee and other expenses.

On February 12, 1999, the Board of Directors approved a
loan in the amount of $350,000 to Patrick B. McGinnis, the
Chairman and Chief Executive Officer of the Company, in exchange
for a full recourse promissory note in the same amount from
Mr. McGinnis. On June 30, 2000, at the direction of
the Board of Directors and in accordance with terms authorized
by it, the Company loaned Mr. McGinnis an additional
$500,000. Under these terms, the $500,000 loan to
Mr. McGinnis was combined with his existing debt to the
Company of $350,000 of principal and $36,520 of accrued
interest. Mr. McGinnis delivered to the Company his full
recourse promissory note in the amount of $886,520, bearing
interest at a fixed rate of 6.62% per annum (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. At December 31,
2003 and 2002, the promissory note of $886,520 and accrued
interest of $101,237 and $39,908, respectively, were
outstanding. Mr. McGinnis used the proceeds of these loans
to repay debts originally incurred by him to pay income taxes
related to the ordinary income deemed to have been received by
him on account of Common Stock granted to him by the former
shareholder of the Company in connection with the initial public
offering of the Companys stock in May 1997, and to
purchase additional stock in the initial public offering. The
balance of the Amended Promissory Note at December 31, 2003
and 2002 is included in Other in the
Stockholders Equity section of the accompanying balance
sheets.

On June 30, 2000, pursuant to Board authorization and in
accordance with the terms of the Amended Promissory Note, the
Company and Mr. McGinnis entered into a deferred
compensation agreement (the Agreement). Under the
Agreement, 50% of the amount otherwise payable to
Mr. McGinnis under the Companys Management Group
Incentive Compensation Plan is to be deferred until the Amended
Promissory Note is paid in full, with such deferred compensation
then being paid in full to Mr. McGinnis within 30 days
thereafter. The Company has full right of set-off against any
deferred compensation under the Agreement should
Mr. McGinnis default under the Amended Promissory Note. At
the election of Mr. McGinnis, the payment of the deferred
compensation, upon payment of the Amended Promissory Note, may
be extended for a period of not more than ten years. At
December 31, 2003, the amount of deferred compensation was
$182,012, with accrued interest of $19,323. At December 31,
2002, the amount of deferred compensation was $72,354 with
accrued interest of $7,627.

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TROVER SOLUTIONS, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)

Effective January 1, 2003, the Company entered into an
employment agreement with Mr. McGinnis. Upon signing the
employment agreement, Mr. McGinnis received a bonus of
$200,000. The bonus is subject to full or partial reimbursement
by Mr. McGinnis to the Company, based on the date of
termination, if Mr. McGinnis terminates his employment with
the Company during the initial three-year term of his
employment. The bonus payment was recorded in Other
Current Assets on the accompanying Balance Sheets and is
being amortized over the term of the agreement. The unamortized
balance December 31, 2003 and 2002 was $133,333 and
$200,000, respectively.

6. PROPERTY AND EQUIPMENT

Property and equipment consists of the following at
December 31, 2003 and 2002 (in thousands):

|                                 |                                           |                             |        |              |       |  |        |         |       | 
|-------------------------------- | ----------------------------------------- | --------------------------- | ------ | ------------ | ----- |  | ------ | ------- | ----- | 
|                                 |                                           | December 31,                |        | December 31,
|                                 |                                           | 2003                        |        | 2002        
|                                 |                                           |                             |        |             
|Property and equipment, at cost: |                                           |                             |        |              |       |  |        |        
|                                
|                                
|                                
|                                
|                                 | Furniture and fixtures                    |                             | $      | 3,126        |       |  | $      | 3,260   |      
|                                
|                                
|                                
|                                
|                                 | Office equipment                          |                             |        | 1,410        |       |  |        | 2,067   |      
|                                
|                                
|                                
|                                
|                                 | Computer equipment                        |                             |        | 7,734        |       |  |        | 11,611  |      
|                                
|                                
|                                
|                                
|                                 | Software                                  |                             |        | 10,614       |       |  |        | 9,584   |      
|                                
|                                
|                                
|                                
|                                 | Leasehold improvements                    |                             |        | 1,886        |       |  |        | 1,429   |      
|                                 |                                           |                             |        |              |       |  |        |        
|                                 |                                           |                             | 24,770 |              |       |  | 27,951 |        
|                                
|                                
|                                
|                                
|                                 | Accumulated depreciation and amortization |                             |        | (18,957      | )     |  |        | (21,499 | )    
|                                 |                                           |                             |        |              |       |  |        |        
|                                 |                                           | Property and equipment, net |        | $            | 5,813 |  |        | $       | 6,452 | 
|                                 |                                           |                             |        |              |       |  |        |        

On November 13, 2001, the Company sold its building in New
Berlin, Wisconsin to a third party. The Company recorded a loss
on the disposal of the building of approximately
$1.0 million during the year ended December 31, 2001.

7. GOODWILL AND OTHER INTANGIBLE ASSETS

Effective January 1, 2002, the Company adopted FAS 142
under which Goodwill is no longer amortized but instead will be
assessed for impairment at least annually. The Company performs
its annual impairment review during the second quarter of each
year. The review performed during the quarter ended
June 30, 2003 did not result in an impairment charge for
the Company. The Companys reporting units are generally
consistent with the operating segments underlying the segments
identified in Note 15 Segment Information. All
recorded Goodwill and Intangible Assets relate to the Healthcare
Recovery Services segment.

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TROVER SOLUTIONS, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)

Following is a reconciliation of previously reported financial
information to adjusted amounts excluding amortization of
Goodwill for the years ended December 31, 2003, 2002 and
2001 (in thousands, except per share amounts):

|                                                                       |                                   |      |       |       |  |      |       |       |  |   |       |       | 
|---------------------------------------------------------------------- | --------------------------------- | ---- | ----- | ----- |  | ---- | ----- | ----- |  | - | ----- | ----- | 
|                                                                       |                                   | 2003 |       | 2002  |  | 2001
|                                                                       |                                   |      |       |       |  |     
|Net income:                                                            |                                   |      |       |       |  |      |       |       |  |   |       |      
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|Net income as reported                                                 |                                   | $    | 5,809 |       |  | $    | 6,830 |       |  | $ | 4,596 |      
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|Amortization of costs in excess of net assets
    acquired, net of tax |                                   |      |      |       |  |      |      |       |  |   | 976   |      
|                                                                       |                                   |      |       |       |  |      |       |       |  |   |       |      
|                                                                       | Adjusted net income               |      | $     | 5,809 |  |      | $     | 6,830 |  |   | $     | 5,572 | 
|                                                                       |                                   |      |       |       |  |      |       |       |  |   |       |      
|Basic earnings per share:                                              |                                   |      |       |       |  |      |       |       |  |   |       |      
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|Earnings per share as reported                                         |                                   | $    | 0.69  |       |  | $    | 0.74  |       |  | $ | 0.47  |      
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|Amortization of costs in excess of net assets
    acquired, net of tax |                                   |      |      |       |  |      |      |       |  |   | 0.10  |      
|                                                                       |                                   |      |       |       |  |      |       |       |  |   |       |      
|                                                                       | Basic earnings per common share   |      | $     | 0.69  |  |      | $     | 0.74  |  |   | $     | 0.57  | 
|                                                                       |                                   |      |       |       |  |      |       |       |  |   |       |      
|Diluted earnings per share:                                            |                                   |      |       |       |  |      |       |       |  |   |       |      
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|Earnings per share as reported                                         |                                   | $    | 0.66  |       |  | $    | 0.72  |       |  | $ | 0.46  |      
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|Amortization of costs in excess of net assets
    acquired, net of tax |                                   |      |      |       |  |      |      |       |  |   | 0.10  |      
|                                                                       |                                   |      |       |       |  |      |       |       |  |   |       |      
|                                                                       | Diluted earnings per common share |      | $     | 0.66  |  |      | $     | 0.72  |  |   | $     | 0.56  | 
|                                                                       |                                   |      |       |       |  |      |       |       |  |   |       |      

The carrying value of Goodwill, net was approximately
$29.1 million at December 31, 2003 and 2002.

The Companys intangible assets (other than Goodwill, net)
are subject to amortization. The details of the Companys
intangible assets at December 31, 2003 and
December 31, 2002 are as follows (in thousands):

|                       |       |                   |       |                   |  |     |       |       |  |              |       |       |  |   |       |       |  |   |       |       |  |   |       |       | 
|---------------------- | ----- | ----------------- | ----- | ----------------- |  | --- | ----- | ----- |  | ------------ | ----- | ----- |  | - | ----- | ----- |  | - | ----- | ----- |  | - | ----- | ----- | 
|                       |       |                   |       |                  
|                       |       | December 31, 2003 |       | December 31, 2002
|                       |       |                   |       |                  
|                       |       |                   |       | Accumulated       |  |     |       |       |  | Accumulated  |       |      
|                       |       | Cost              |       | Amortization      |  | Net |       | Cost  |  | Amortization |       | Net  
|                       |       |                   |       |                   |  |     |       |       |  |              |       |      
|Client lists           |       | $                 | 4,900 |                   |  | $   | 1,599 |       |  | $            | 3,301 |       |  | $ | 4,900 |       |  | $ | 1,272 |       |  | $ | 3,628 |      
|                      
|                      
|                      
|                      
|Backlog                |       |                   | 570   |                   |  |     | 560   |       |  |              | 10    |       |  |   | 570   |       |  |   | 447   |       |  |   | 123   |      
|                      
|                      
|                      
|                      
|Non-compete agreements |       |                   | 530   |                   |  |     | 526   |       |  |              | 4     |       |  |   | 530   |       |  |   | 471   |       |  |   | 59    |      
|                       |       |                   |       |                   |  |     |       |       |  |              |       |       |  |   |       |       |  |   |       |       |  |   |       |      
|                       | Total |                   | $     | 6,000             |  |     | $     | 2,685 |  |              | $     | 3,315 |  |   | $     | 6,000 |  |   | $     | 2,190 |  |   | $     | 3,810 | 
|                       |       |                   |       |                   |  |     |       |       |  |              |       |       |  |   |       |       |  |   |       |       |  |   |       |      

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 years
ended December 31, 2003, 2002 and 2001 was approximately
$496,000, $562,000 and $562,000, respectively. Over the five
succeeding fiscal years, amortization expense related to
intangible assets is expected to be as follows (in thousands):

|                         |  |   |     | 
|------------------------ |  | - | --- | 
|                        
|                        
|                        
|                        
|Year ending December 31: |  |   |     | 
|                        
|                        
|                        
|                        
|2004                     |  | $ | 340 | 
|                        
|                        
|                        
|                        
|2005                     |  |   | 327 | 
|                        
|                        
|                        
|                        
|2006                     |  |   | 327 | 
|                        
|                        
|                        
|                        
|2007                     |  |   | 327 | 
|                        
|                        
|                        
|                        
|2008                     |  |   | 327 | 

8. ACCRUED LIABILITIES

Self-Insurance

Effective January 1, 2002, the Company instituted a program
of self-insurance that offers group healthcare coverage to its
employees and their spouses and dependent children. The
Companys provision for

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TROVER SOLUTIONS, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)

loss from future claims under this self-insurance program is
based upon an independent actuarial estimate. This provision
includes estimated liabilities determined from both reported
paid claims and claims liabilities incurred but not reported
(IBNR). As noted, the accrual for these liabilities is based on
estimates and while management believes that the provision for
loss is adequate, the ultimate liability may be in excess of or
less than the amounts recorded. The methods used in determining
these liabilities are periodically reviewed and adjustments are
reflected in current earnings. The provision for future
healthcare claims of $368,000 and $524,000 at December 31,
2003 and 2002, respectively, is recorded in Accrued Expenses as
a current liability in the accompanying Balance Sheet.

Accrued Payroll and Bonuses

Accrued payroll and bonuses in the accompanying balance sheets
at December 31, 2003 and 2002 approximate $4.4 million
and $5.3 million, respectively.

9. EMPLOYEE BENEFIT PLAN

Pension Plan

Effective on January 1, 1997, the Companys employees
began participation in the Companys 401(k) defined
contribution pension plan. An annual expense provision for the
plan is based upon the level of employee participation, as the
plan requires the Company to match a certain portion of the
employees contributions. For the years ended
December 31, 2003, 2002 and 2001, participants were given
the option of receiving their match in cash or in Common Stock
of the Company. For participants choosing the stock match, the
Company contributed up to 100% of the participants
contribution, not to exceed 6% of the participants annual
compensation. For participants choosing the cash match, the
Company contributed up to 50% of the participants
contribution, not to exceed 6% of the participants annual
compensation. Total retirement plan expense was approximately
$760,000, $786,000 and $707,000 for the years ended
December 31, 2003, 2002 and 2001, respectively.

Other

Accrued bonuses included in the accompanying balance sheets at
December 31, 2003 and 2002 approximate $2.6 million
and $3.7 million, respectively.

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 contract under which the Company agrees
to pay fixed rates of interest is considered a hedge against
changes in the amount of future cash flows associated with the
Companys interest payments on its variable rate Revolving
Credit Facility. Accordingly, the interest rate swap contract is
considered a cash flow hedge and is reported at fair value on
the balance sheet in Other Liabilities at

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TROVER SOLUTIONS, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)

December 31, 2003 and 2002 and the related gain (or loss)
on the contract is deferred in shareholders equity (as a
component of accumulated other comprehensive income). This
deferred gain (or loss) is then amortized as an adjustment to
interest expense over the same period in which the related
interest payments being hedged are recognized in income.

Should the Company enter into contracts that are not considered
to be perfectly effective in offsetting the change in the value
of the interest payments being hedged, any changes in fair value
relating to the ineffective portion of this contract is
immediately recognized in income. The net effect of this
accounting on the Companys operating results is that
interest expense on the portion of the variable rate Revolving
Credit Facility being hedged is generally recorded based on
fixed interest rates.

At the inception of the interest rate contract, the fair value
of the hedge was $0. At December 31, 2003, the fair value
of the hedge was a liability of $86,397 (($51,838), net of tax,
included in Other Comprehensive Income (Loss)). At
December 31, 2002, the fair value of the hedge was a
liability of $144,804 (($86,882), net of tax, included in Other
Comprehensive Income (Loss)).

11. 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), and the existing credit facility was
terminated. The Companys obligations under the Revolving
Credit Facility are collateralized 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 December 31, 2003, the interest rate was
2.92% based on the one-month Eurodollar Rate plus the fixed
margin. The Revolving Credit Facility contains customary
covenants and events of default including, but not limited to,
financial tests for interest coverage, net worth levels and
leverage that may limit the Companys ability to pay
dividends. The Company was in compliance with these covenants at
December 31, 2003. It also contains a material adverse
change clause. At December 31, 2003 and 2002,
$4 million was outstanding under the Revolving Credit
Facility.

12. STOCK BASED COMPENSATION

In May 1997, the Company adopted its Non-Qualified Stock Option
Plan for Eligible Employees (the Employees Plan),
the Employee Stock Purchase Plan (the Purchase
Plan), and the Directors Stock Option Plan, which it
amended and restated in August 1998 (the
Directors Plan). On December 8, 1997, the
Company adopted its 1997 Stock Option Plan for Eligible
Participants, which it amended in May 1999 (the 1997
Plan). On May 10, 2002, the Company adopted its
Outside Directors Equity Compensation Plan (the 2002
Outside Directors Stock Plan).

The Employees Plan provides for the award of stock options
to certain officers and key employees of the Company. Options
under the Employees Plan may be granted with an exercise
price greater than or less than the market value of the
Companys Common Stock on the date of grant. Awards under
the Employees Plan expire ten years from the date of
grant, and pursuant to individual option agreements under the
Employees Plan, vest ratably over at least a three-year
period. As provided in the Employees Plan, all options
granted to the Companys employees automatically vest in
the event of a change in control. At December 31, 2003,
671,250 shares of Common Stock were reserved for issuance under
the Employees Plan, including 176,583 shares available for
future award.

The Directors Plan provided for the grant of options to
purchase the Companys Common Stock to each non-employee
director of the Company. Options under the Directors Plan
are exercisable at 100% of the

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TROVER SOLUTIONS, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)

market value of the Companys Common Stock on the date of
grant. Pursuant to the Directors Plan, each eligible
director was granted on the date he or she first becomes a
director an option to purchase 10,000 shares of Common Stock,
and each eligible director was granted on the date of each
annual meeting of stockholders of the Company beginning in 1998
an option to purchase 2,000 shares of Common Stock, for so long
as shares are available under the Directors Plan, but not
after March 31, 2002 at which time the plan terminated.
Terms of options granted under this plan commence on the date of
grant and expire on the tenth anniversary of the grant date.
Each option is to become exercisable when vested. Pursuant to
individual option agreements under the Directors Plan,
options granted under the Directors Plan vest ratably over
a three-year period, provided that the optionee must be a
non-employee director of the Company on each such anniversary in
order for options to vest on such date. At December 31,
2003, 150,000 shares of Common Stock were reserved for issuance
under the Directors Plan, none for future award.

The 1997 Plan provides for the grant of options to purchase the
Companys Common Stock to eligible participants of the
Company at 100% of the market value of the Companys Common
Stock on the date of grant. Awards under the 1997 Plan expire
ten years from the date of grant and vest according to the terms
that the compensation committee of the Board of Directors
determines in its sole discretion. As provided in the 1997 Plan,
all options granted to the Companys employees
automatically vest in the event of a change in control. At
December 31, 2003, 1,645,289 shares of Common Stock have
been reserved under the 1997 Plan, of which 151,001 shares are
available for future award.

The 2002 Outside Directors Stock Plan was approved on
May 10, 2002. Each director of the Company that is not an
employee of the Company has a right to elect to receive Common
Stock in lieu of cash for all or part of his or her outside
director compensation package. In any event, each director will
receive not less than one-third of his or her annual retainer
fee in Common Stock regardless of whether he or she makes an
election under the plan. In addition, each director
automatically will be granted an option under the plan to
purchase 10,000 shares of Common Stock on the effective date of
his or her initial election or appointment as a member of the
Board at an option exercise price equal to the fair market value
of a share of Common Stock on such date. Further, each director
automatically will be granted each calendar year subsequent to
the calendar year in which his or her initial election or
appointment as a member of the Board becomes effective, options
under the plan to purchase 1,000 shares of Common Stock as of
each March 31, June 30, September 30 and
December 31, if he or she is still a director on such grant
date, at an exercise price equal to the fair market value of a
share on such date. At December 31, 2003, 243,350 shares of
Common Stock have been reserved under the 2002 Outside Directors
Stock Plan, of which 208,350 shares are available for future
issue.

Activity related to the Employees Plan, Directors
Plan, 1997 Plan and 2002 Outside Directors Stock Plan for the
years ended December 31, 2003, 2002 and 2001 is summarized
as follows:

|                                                                               |           |        |       |                  |   |        |      |                  |  |        |       |                  |   |   |      |      |  |   |       |      |   |   |      |       | 
|------------------------------------------------------------------------------ | --------- | ------ | ----- | ---------------- | - | ------ | ---- | ---------------- |  | ------ | ----- | ---------------- | - | - | ---- | ---- |  | - | ----- | ---- | - | - | ---- | ----- | 
|                                                                               |           |        |       |                  |   |       
|                                                                               |           | 2003   |       | 2002             |   | 2001  
|                                                                               |           |        |       |                  |   |       
|                                                                               |           | Shares |       | Weighted-Average |   | Shares |      | Weighted-Average |  | Shares |       | Weighted-Average
|                                                                               |           | (000)  |       | Exercise Price   |   | (000)  |      | Exercise Price   |  | (000)  |       | Exercise Price  
|                                                                               |           |        |       |                  |   |        |      |                  |  |        |       |                 
|Options outstanding as of January 1                                            |           |        | 2,251 |                  |   | $      | 8.82 |                  |  |        | 2,274 |                  |   | $ | 8.82 |      |  |   | 2,336 |      |   | $ | 9.13 |      
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|                                                                               | Granted   |        |       | 94               |   |        | $    | 5.53             |  |        |       | 105              |   |   | $    | 4.83 |  |   |       | 103  |   |   | $    | 4.57  | 
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|                                                                               | Exercised |        |       | (46              | ) |        | $    | 3.80             |  |        |       | (67              | ) |   | $    | 3.95 |  |   |       | (4   | ) |   | $    | 3.75  | 
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|                                                                               | Canceled  |        |       | (193             | ) |        | $    | 6.16             |  |        |       | (61              | ) |   | $    | 7.34 |  |   |       | (161 | ) |   | $    | 10.91 | 
|                                                                               |           |        |       |                  |   |        |      |                  |  |        |       |                  |   |   |      |      |  |   |       |      |   |   |      |      
|Options outstanding as of December 31                                          |           |        | 2,106 |                  |   | $      | 9.03 |                  |  |        | 2,251 |                  |   | $ | 8.82 |      |  |   | 2,274 |      |   | $ | 8.82 |      
|                                                                               |           |        |       |                  |   |        |      |                  |  |        |       |                  |   |   |      |      |  |   |       |      |   |   |      |      
|Weighted-average fair value of options granted
    during the year (per share) |           | $      | 1.92  |                  |   |        |      |                  |  | $      | 2.98  |                  |   |   |      |      |  | $ | 2.91  |      |   |   |      |      
|                                                                               |           |        |       |                  |   |        |      |                  |  |        |       |                  |   |   |      |      |  |   |       |      |   |   |      |      

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TROVER SOLUTIONS, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)

As of December 31, 2003, 2002 and 2001 there were
1.7 million, 1.6 million and 1.4 million options
exercisable, respectively.

The following table summarizes information about options
outstanding under the Employees Plan, Directors
Plan, 1997 Plan and 2002 Outside Directors Stock Plan at
December 31, 2003:

|                         |  |                     |       |                     |  |           |     |              |  |           |       |  |  |  |       |  |  |   |       | 
|------------------------ |  | ------------------- | ----- | ------------------- |  | --------- | --- | ------------ |  | --------- | ----- |  |  |  | ----- |  |  | - | ----- | 
|                         |  |                     |       |                    
|                         |  | Options Outstanding |       | Options Exercisable
|                         |  |                     |       |                    
|                         |  | Number              |       | Weighted-           |  |           |     | Number       |  |          
|                         |  | Outstanding         |       | Average             |  | Weighted- |     | Outstanding  |  | Weighted-
|                         |  | December 31,        |       | Remaining           |  | Average   |     | December 31, |  | Average  
|                         |  | 2003                |       | Contractual         |  | Exercise  |     | 2003         |  | Exercise 
|Range of exercise prices |  | (000)               |       | Life (years)        |  | Price     |     | (000)        |  | Price    
|                         |  |                     |       |                     |  |           |     |              |  |          
|$ 2.75  $ 4.13          |  |                     | 787   |                     |  |           | 6.4 |              |  | $         | 3.15  |  |  |  | 489   |  |  | $ | 3.13  | 
|                        
|                        
|                        
|                        
|$ 4.14  $ 6.20          |  |                     | 428   |                     |  |           | 5.8 |              |  |           | 4.71  |  |  |  | 361   |  |  |   | 4.57  | 
|                        
|                        
|                        
|                        
|$ 6.21  $ 9.30          |  |                     | 16    |                     |  |           | 9.7 |              |  |           | 6.93  |  |  |  | 1     |  |  |   | 8.31  | 
|                        
|                        
|                        
|                        
|$ 9.31  $13.95          |  |                     | 5     |                     |  |           | 3.2 |              |  |           | 10.48 |  |  |  | 5     |  |  |   | 10.48 | 
|                        
|                        
|                        
|                        
|$13.96  $20.93          |  |                     | 815   |                     |  |           | 3.7 |              |  |           | 16.11 |  |  |  | 815   |  |  |   | 16.11 | 
|                        
|                        
|                        
|                        
|$20.93  $23.76          |  |                     | 55    |                     |  |           | 3.8 |              |  |           | 22.48 |  |  |  | 55    |  |  |   | 22.48 | 
|                         |  |                     |       |                     |  |           |     |              |  |           |       |  |  |  |       |  |  |   |       | 
|                         |  |                     | 2,106 |                     |  |           | 5.2 |              |  |           | 9.03  |  |  |  | 1,726 |  |  |   | 10.20 | 
|                         |  |                     |       |                     |  |           |     |              |  |           |       |  |  |  |       |  |  |   |       | 

The Company accounts for options granted under its employee
stock-based compensation plans in accordance with APB
No. 25, Accounting for Stock Issued to
Employees. As a result, the Company has not recognized
compensation expense for stock options granted with an exercise
price equal to the quoted market price of the Common Stock on
the date of grant and that vest based solely on continuation of
employment by the recipient of the option award. The Company
adopted SFAS No. 123 (as amended by SFAS No. 148 in
2002) for disclosure purposes in 1996. For SFAS No. 123
purposes, the fair value of each option grant and stock-based
award has been estimated as of the date of grant using the
Black-Scholes option pricing model. The following summarizes the
weighted average assumptions used in valuing awards under the
Employees Plan, Directors Plan, 1997 Plan and 2002
Outside Directors Stock Plan:

|                        |  |      |      |      |  |      |      |   |  |  |      |  
|----------------------- |  | ---- | ---- | ---- |  | ---- | ---- | - |  |  | ---- | -
|                        |  | 2003 |      | 2002 |  | 2001
|                        |  |      |      |      |  |     
|Expected life (years)   |  |      | 5.0  |      |  |      | 5.0  |   |  |  | 5.0  |  
|                       
|                       
|                       
|                       
|Risk-free interest rate |  |      | 3.0  | %    |  |      | 3.3  | % |  |  | 4.7  | %
|                       
|                       
|                       
|                       
|Dividend yield          |  |      | 0.0  |      |  |      | 0.0  |   |  |  | 0.0  |  
|                       
|                       
|                       
|                       
|Expected volatility     |  |      | 13.5 |      |  |      | 67.2 |   |  |  | 75.5 |  

As of December 31, 2003, the Company had granted 10,000
shares of restricted stock, all of which were granted during
2002. The weighted average grant price was $5.20. The shares
vest over a five year period. The cost of the awards, determined
to be the fair market value of the shares at the date of grant,
is charged to compensation expense ratably over the vesting
period. The Company has recorded compensation expense of $11,000
and $13,000 for the years ended December 31, 2003 and 2002,
respectively.

Under the Purchase Plan, eligible employees may purchase shares
of the Companys Common Stock, subject to certain
limitations, at the lesser of 85% of its market value on the
first day of the purchase period or 85% of its market value on
the last day of the purchase period. The plan provides for
semi-annual purchase periods. Purchases are made from payroll
deductions up to a maximum of 15% of an employees eligible
annual compensation. During the years ended December 31,
2003, 2002 and 2001, employees paid the Company $52,000, $89,000
and $91,000, respectively, to purchase 11,768 shares, 22,608
shares and 35,782 shares, respectively. As of December 31,
2003, there were 182,456 shares of Common Stock reserved for
future purchase under the Purchase Plan.

On February 12, 1999, the Board adopted a Stockholder
Rights Plan (the Rights Plan) and declared a
dividend of one preferred stock purchase right (a
Right) for each outstanding share of Common Stock of

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TROVER SOLUTIONS, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)

the Company. The dividend was payable to stockholders of record
on March 1, 1999. The Rights, which will initially trade
with the Common Stock, separate and become exercisable only upon
the earlier to occur of (i) 10 days after the date
(the Stock Acquisition Date) of a public
announcement that a person or group of affiliated persons has
acquired 20% or more of the Common Stock (such person or group
being hereinafter referred to as an Acquiring
Person) or (ii) 10 days (or such later date as
the Board of Directors shall determine) after the commencement
of, or announcement of an intention to make, a tender offer or
exchange offer that could result in such person or group owning
20% or more of the Common Stock (the earlier of such dates being
called the Distribution Date). When exercisable,
each Right initially entitles the registered holder to purchase
from the Company one one-hundredth of a share of a newly created
class of preferred stock of the Company at a purchase price of
$65 (the Purchase Price). The Rights are redeemable
for $0.001 per Right at the option of the Board of Directors.
The Rights expire on March 1, 2009.

If any person becomes an Acquiring Person, each holder of a
Right will thereafter have the right (the Flip-In
Right) to receive, in lieu of shares of preferred stock
and upon payment of the Purchase Price, shares of Common Stock
having a value equal to two times the Purchase Price of the
Right. Also, if at any time on or after the Stock Acquisition
Date, (i) the Company is acquired in a transaction in which
the holders of all the outstanding shares of Common Stock
immediately prior to the consummation of the transaction are not
the holders of all of the surviving corporations voting
power, or (ii) more than 50% of the Companys assets,
cash flow or earning power is sold or transferred other than in
the ordinary course of business, then each holder of a Right
shall thereafter have the right (the Flip-Over
Right) to receive, in lieu of shares of preferred stock
and upon exercise and payment of the Purchase Price, common
shares of the acquiring company having a value equal to two
times the Purchase Price. If a transaction would otherwise
result in a holder having a Flip-In as well as a Flip-Over
Right, then only the Flip-Over Right will be exercisable. If a
transaction results in a holder having a Flip-Over Right
subsequent to a transaction resulting in the holder having a
Flip-In Right, a holder will have a Flip-Over Right only to the
extent such holders Flip-In Rights have not been exercised.

On February 19, 2004, in connection with the Proposed
Transaction, the Company and National City Bank, as Rights
Agent, executed a First Amendment to Rights Agreement, which
amends the Stockholders Rights Plan and renders the Rights
inapplicable to the transactions contemplated by the definitive
agreement announced by the Company on February 20, 2004.
See Note 19 Subsequent Event below.

13. 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 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 terminates the stock
repurchase plan. The Company repurchased 172,622 shares of
Common Stock during the year ended December 31, 2003 at a
cost of $0.9 million, or an average price of $5.23 per
share. From inception of the program through December 31,
2003, the Company repurchased 3,269,630 shares at a cost of
$14.5 million, or an average cost of $4.43 per share.
Except for 8,874 shares of previously repurchased but reissued
in connection with an employee restricted stock award, all of
the reacquired shares of Common Stock through December 31,
2003 are reflected as treasury stock on the accompanying Balance
Sheets.

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TROVER SOLUTIONS, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)

14. OTHER COMPREHENSIVE INCOME (LOSS)

Other comprehensive income (loss) for the years ended
December 31, 2003, 2002 and 2001 consists of the following
(in thousands):

|                                             |  |      |       |      |  |      |       |   |  |   |       | 
|-------------------------------------------- |  | ---- | ----- | ---- |  | ---- | ----- | - |  | - | ----- | 
|                                             |  | 2003 |       | 2002 |  | 2001
|                                             |  |      |       |      |  |     
|Net income                                   |  | $    | 5,809 |      |  | $    | 6,830 |   |  | $ | 4,596 | 
|                                            
|                                            
|                                            
|                                            
|Other comprehensive income (loss):           |  |      |       |      |  |      |       |   |  |   |       | 
|                                            
|                                            
|                                            
|                                            
|Deferred (loss) gain on cash flow hedge, net |  |      | 36    |      |  |      | (114  | ) |  |   | 27    | 
|                                             |  |      |       |      |  |      |       |   |  |   |       | 
|Comprehensive income, net of tax             |  | $    | 5,845 |      |  | $    | 6,716 |   |  | $ | 4,623 | 
|                                             |  |      |       |      |  |      |       |   |  |   |       | 

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

|                                    |  |           |      |  
|----------------------------------- |  | --------- | ---- | -
|                                    |  | Cash Flow
|                                    |  | Hedge    
|                                    |  |          
|Balance, December 31, 2000          |  | $         |     |  
|                                   
|                                   
|                                   
|                                   
|Year ended December 31, 2001 change |  |           | 27   |  
|                                    |  |           |      |  
|Balance, December 31, 2001          |  |           | 27   |  
|                                   
|                                   
|                                   
|                                   
|Year ended December 31, 2002 change |  |           | (114 | )
|                                    |  |           |      |  
|Balance, December 31, 2002          |  |           | (87  | )
|                                   
|                                   
|                                   
|                                   
|Year ended December 31, 2003 change |  |           | 36   |  
|                                    |  |           |      |  
|Balance, December 31, 2003          |  | $         | (51  | )
|                                    |  |           |      |  

15. SEGMENT INFORMATION

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

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 reported three 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, overpayments, and MD Audit;
(2) Property and Casualty Recovery Services, which is
subrogation recovery services for property and casualty
insurers, sold under the name TransPaC Solutions; and
(3) Software, which is subrogation recovery software in a
browser-based application service provider (ASP) form, sold
under the name Troveris. The segment profit measure is income
before income taxes.

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TROVER SOLUTIONS, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)

Segment results for the years ended December 31, 2003, 2002
and 2001 are as follows (in thousands):

|                                   |                                                                 |                                     |   |         |        |      |   |         |        |  |   |         |        | 
|---------------------------------- | --------------------------------------------------------------- | ----------------------------------- | - | ------- | ------ | ---- | - | ------- | ------ |  | - | ------- | ------ | 
|                                   |                                                                 | 2003                                |   | 2002    |        | 2001
|                                   |                                                                 |                                     |   |         |        |     
|Revenues:                          |                                                                 |                                     |   |         |        |      |   |         |        |  |   |        
|                                  
|                                  
|                                  
|                                  
|                                   | Healthcare Recovery Services                                    |                                     | $ | 64,684  |        |      | $ | 68,788  |        |  | $ | 63,960  |       
|                                  
|                                  
|                                  
|                                  
|                                   | Property and Casualty Recovery Services                         |                                     |   | 989     |        |      |   | 678     |        |  |   | 187     |       
|                                  
|                                  
|                                  
|                                  
|                                   | Software                                                        |                                     |   | 1,784   |        |      |   | 764     |        |  |   |        |       
|                                  
|                                  
|                                  
|                                  
|                                   | Elimination of intercompany revenue                             |                                     |   | (1,709  | )      |      |   | (752    | )      |  |   |        |       
|                                   |                                                                 |                                     |   |         |        |      |   |         |        |  |   |        
|                                   |                                                                 | Total revenues                      |   | $       | 65,748 |      |   | $       | 69,478 |  |   | $       | 64,147 | 
|                                   |                                                                 |                                     |   |         |        |      |   |         |        |  |   |        
|Operating income (loss):           |                                                                 |                                     |   |         |        |      |   |         |        |  |   |        
|                                  
|                                  
|                                  
|                                  
|                                   | Healthcare Recovery Services                                    |                                     | $ | 27,954  |        |      | $ | 28,696  |        |  | $ | 22,051  |       
|                                  
|                                  
|                                  
|                                  
|                                   | Property and Casualty Recovery Services                         |                                     |   | (987    | )      |      |   | (973    | )      |  |   | (1,128  | )     
|                                  
|                                  
|                                  
|                                  
|                                   | Software                                                        |                                     |   | (515    | )      |      |   | (651    | )      |  |   | (1,278  | )     
|                                  
|                                  
|                                  
|                                  
|                                   | Unallocated Corporate support expenses                          |                                     |   | (16,533 | )      |      |   | (15,770 | )      |  |   | (11,824 | )     
|                                   |                                                                 |                                     |   |         |        |      |   |         |        |  |   |        
|                                   |                                                                 | Total operating income              |   | $       | 9,919  |      |   | $       | 11,302 |  |   | $       | 7,821  | 
|                                   |                                                                 |                                     |   |         |        |      |   |         |        |  |   |        
|Depreciation and amortization:     |                                                                 |                                     |   |         |        |      |   |         |        |  |   |        
|                                  
|                                  
|                                  
|                                  
|                                   | Healthcare Recovery Services                                    |                                     | $ | 2,685   |        |      | $ | 4,066   |        |  | $ | 5,958   |       
|                                  
|                                  
|                                  
|                                  
|                                   | Property and Casualty Recovery Services                         |                                     |   | 87      |        |      |   | 125     |        |  |   | 64      |       
|                                  
|                                  
|                                  
|                                  
|                                   | Software                                                        |                                     |   | 44      |        |      |   | 33      |        |  |   | 199     |       
|                                  
|                                  
|                                  
|                                  
|                                   | Unallocated Corporate depreciation and
    amortization expense |                                     |   | 552     |        |      |   | 536     |        |  |   | 480     |       
|                                   |                                                                 |                                     |   |         |        |      |   |         |        |  |   |        
|                                   |                                                                 | Total depreciation and amortization |   | $       | 3,368  |      |   | $       | 4,760  |  |   | $       | 6,701  | 
|                                   |                                                                 |                                     |   |         |        |      |   |         |        |  |   |        
|Income (loss) before income taxes: |                                                                 |                                     |   |         |        |      |   |         |        |  |   |        
|                                  
|                                  
|                                  
|                                  
|                                   | Healthcare Recovery Services                                    |                                     | $ | 27,982  |        |      | $ | 28,771  |        |  | $ | 22,312  |       
|                                  
|                                  
|                                  
|                                  
|                                   | Property and Casualty Recovery Services                         |                                     |   | (1,025  | )      |      |   | (1,016  | )      |  |   | (1,142  | )     
|                                  
|                                  
|                                  
|                                  
|                                   | Software                                                        |                                     |   | (622    | )      |      |   | (792    | )      |  |   | (1,309  | )     
|                                  
|                                  
|                                  
|                                  
|                                   | Unallocated Corporate (loss)                                    |                                     |   | (16,653 | )      |      |   | (15,893 | )      |  |   | (13,168 | )     
|                                   |                                                                 |                                     |   |         |        |      |   |         |        |  |   |        
|                                   |                                                                 | Total income before income taxes    |   | $       | 9,682  |      |   | $       | 11,070 |  |   | $       | 6,693  | 
|                                   |                                                                 |                                     |   |         |        |      |   |         |        |  |   |        

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.

16. LEASE COMMITMENTS

Future minimum lease payments for office space, by year, under
noncancelable operating leases with initial or remaining terms
in excess of one year at December 31, 2003 are as follows
(in thousands):

|           |  |   |       | 
|---------- |  | - | ----- | 
|          
|          
|          
|          
|2004       |  | $ | 2,340 | 
|          
|          
|          
|          
|2005       |  |   | 2,227 | 
|          
|          
|          
|          
|2006       |  |   | 2,301 | 
|          
|          
|          
|          
|2007       |  |   | 1,815 | 
|          
|          
|          
|          
|2008       |  |   | 1,053 | 
|          
|          
|          
|          
|Thereafter |  |   | 390   | 

62



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##### Table of Contents



TROVER SOLUTIONS, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)

Rental expense, which includes amounts applicable to short-term
leases, was approximately $2,292,000, $2,386,000, and $2,092,000
for the years ended December 31, 2003, 2002 and 2001,
respectively.

17. 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, from time to time, been, and in
the future expects to be, named as a party in litigation
incidental to its business operations. 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 and financial condition.

In January 2001, the Company reached an agreement in principle
to settle the DeGarmo class action litigation for
$3.0 million which was reported in the fourth quarter of
2000. The settlement was paid in July 2001.



|    |                                            
|--- | -------------------------------------------
|18. | QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

A summary of the Companys quarterly results of operations
follows (dollars in thousands, except per share amounts):

|                                    |  |       |        |        |  |       |        |        |  |   |        |  |  |   |        | 
|----------------------------------- |  | ----- | ------ | ------ |  | ----- | ------ | ------ |  | - | ------ |  |  | - | ------ | 
|                                    |  | First |        | Second |  | Third |        | Fourth
|                                    |  |       |        |        |  |       |        |       
|Year Ended December 31, 2003:       |  |       |        |        |  |       |        |        |  |   |        |  |  |   |        | 
|                                   
|                                   
|                                   
|                                   
|Claims revenues                     |  | $     | 16,353 |        |  | $     | 17,004 |        |  | $ | 16,068 |  |  | $ | 16,323 | 
|                                   
|                                   
|                                   
|                                   
|Income before income taxes          |  |       | 2,495  |        |  |       | 2,757  |        |  |   | 2,465  |  |  |   | 1,965  | 
|                                   
|                                   
|                                   
|                                   
|Net income                          |  |       | 1,497  |        |  |       | 1,654  |        |  |   | 1,479  |  |  |   | 1,179  | 
|                                   
|                                   
|                                   
|                                   
|Earnings per common share (basic)   |  |       | 0.18   |        |  |       | 0.20   |        |  |   | 0.18   |  |  |   | 0.14   | 
|                                   
|                                   
|                                   
|                                   
|Earnings per common share (diluted) |  |       | 0.17   |        |  |       | 0.19   |        |  |   | 0.17   |  |  |   | 0.13   | 

|                                    |  |       |        |        |  |       |        |        |  |   |        |  |  |   |        | 
|----------------------------------- |  | ----- | ------ | ------ |  | ----- | ------ | ------ |  | - | ------ |  |  | - | ------ | 
|                                    |  | First |        | Second |  | Third |        | Fourth
|                                    |  |       |        |        |  |       |        |       
|Year Ended December 31, 2002:       |  |       |        |        |  |       |        |        |  |   |        |  |  |   |        | 
|                                   
|                                   
|                                   
|                                   
|Claims revenues                     |  | $     | 17,469 |        |  | $     | 17,294 |        |  | $ | 17,820 |  |  | $ | 16,895 | 
|                                   
|                                   
|                                   
|                                   
|Income before income taxes          |  |       | 2,728  |        |  |       | 2,636  |        |  |   | 2,886  |  |  |   | 2,820  | 
|                                   
|                                   
|                                   
|                                   
|Net income                          |  |       | 1,691  |        |  |       | 1,615  |        |  |   | 1,789  |  |  |   | 1,735  | 
|                                   
|                                   
|                                   
|                                   
|Earnings per common share (basic)   |  |       | 0.17   |        |  |       | 0.17   |        |  |   | 0.20   |  |  |   | 0.20   | 
|                                   
|                                   
|                                   
|                                   
|Earnings per common share (diluted) |  |       | 0.17   |        |  |       | 0.17   |        |  |   | 0.19   |  |  |   | 0.19   | 

19. SUBSEQUENT EVENT

On February 20, 2004, the Company announced that it had
entered into a definitive agreement to be acquired in an
all-cash transaction in which TSI Acquisition Co., Inc., a
wholly-owned subsidiary of TSI Holding Co., Inc., will be merged
into the Company. TSI Holding Co., Inc. is an affiliate of
Tailwind Capital Partners LLC (Tailwind), which manages Thomas
Weisel Capital Partners, L.P., a private equity fund. As a
result of the merger (the Proposed Transaction),
every stockholder of the Company will receive $7.00 per share in
cash, except that certain members of management will obtain new
stock option grants by TSI Holding Co., Inc. (which will be the
parent corporation of the surviving entity), may exchange
unexercised in the money stock options of the
Company for stock options of TSI Holding Co., Inc., and may
purchase shares of common stock of TSI Holding Co., Inc. at
$7.00 per share. Immediately following the Proposed Transaction,
TSI Holding Co., Inc. will be owned by Tailwind, certain members
of management of the Company, and certain co-investors.

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TROVER SOLUTIONS, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)

If completed, the Proposed Transaction will constitute a going
private transaction and will result in the Company no longer
being publicly traded and no longer filing annual, quarterly and
current reports with the Securities and Exchange Commission
(SEC). The Proposed Transaction must be approved by
the Companys stockholders at a special meeting of the
stockholders, which the Company expects will occur in the second
quarter of 2004. The Proposed Transaction is also subject to
customary closing conditions. The obligation of Tailwind to
proceed under the definitive agreement expires if the Company is
unable to close the Proposed Transaction by July 15, 2004.

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##### Table of Contents






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

None




Item 9A.     Controls and
Procedures

As required by Securities and Exchange Commission
(SEC) rules, the Company has evaluated the
effectiveness of the design and operation of its disclosure
controls and procedures as of the end of the period covered by
this annual report. This evaluation was carried out under the
supervision and with the participation of the Companys
management, including its principal executive officer and
principal financial officer. Based on this evaluation, these
officers have concluded that the design and operation of the
Companys disclosure controls and procedures are effective.
There were no changes to the Companys internal controls
over financial reporting during the period covered by this
report that materially affected, or are reasonably likely to
materially affect, the Companys internal controls over
financial reporting subsequent to the date of their evaluation.

Disclosure controls and procedures are the Companys
controls and other procedures that are designed to ensure that
information required to be disclosed by the Company in the
reports that it files or submits under the Securities Exchange
Act of 1934, as amended (the Exchange Act), is
recorded, processed, summarized and reported, within the time
periods specified in SEC rules and forms. Disclosure controls
and procedures include, without limitation, controls and
procedures designed to ensure that information required to be
disclosed by the Company in the reports that it files or submits
under the Exchange Act are accumulated and communicated to the
Companys management, including its principal executive
officer and principal financial officer, as appropriate, to
allow timely decisions regarding required disclosure.




PART III




Item 10.     Directors and
Executive Officers of the Registrant

DIRECTORS

Mr. John H. Newman





Mr. Newman is a senior partner in the international law
firm of Sidley Austin Brown & Wood LLP. He joined
the firm in 1972 and became a partner in 1980. Based in New York
City, Mr. Newmans legal practice is concentrated on
the representation of domestic and international issuers and
underwriters in the capital formation process.

Mr. Chris B. Van Arsdel





Since July 2001 Mr. Van Arsdel has served as an independent
consultant in the technology services industry. He served from
July 2000 to July 2001 as a Senior Vice President at
BancTec, Inc., where he was responsible for the companys
hardware and software products and its service organization.
From 1970 to 1999, Mr. Van Arsdel served as an executive
with Electronic Data Systems Corporation, responsible for
technical engineering and customer service support groups.

Mr. William C. Ballard, Jr.





Since 1992, Mr. Ballard has been of counsel to the law firm
Greenebaum Doll & McDonald PLLC in Louisville,
Kentucky. Mr. Ballard retired from his role as the Chief
Financial Officer and a director of

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Mr. Lauren N. Patch





Mr. Patch is a business consultant with Patch &
Associates LLC and with Patch Nyhan Enterprises, LLC. Since
August 2003, Mr. Patch has served as Chief Executive
Officer and President of 4MyBenefits, Inc. Since February 2004,
Mr. Patch has also served as Chief Executive Officer and
President of Tristate Insurance Managers, LLC and as Vice
President of Tristate Medical Insurance Co., Risk Retention
Group. From September 2001 until January 2003, Mr. Patch
served as Chief Executive Officer of Wyncom, Inc., a provider of
leadership education and training. Mr. Patch also served,
from June 2000 to July 2001, as a consultant to and Interim
Chief Executive Officer of InsurePoint.com. From January 1991 to
February 2000 Mr. Patch served as Chief Executive Officer
and President of The Ohio Casualty Insurance Company, a
Fortune 1000 company in the insurance and financial
services sectors. He is a past director of Wyncom, Inc., Ohio
Casualty Corporation, First Financial Bancorp and the Insurance
Services Office, and currently serves on the board of directors
of Tristate Medical Insurance Co., Risk Retention Group.

Ms. Jill L. Force





Ms. Force has been a partner with The Allegro Group, a
healthcare financial advisory firm, since November 1999. From
May 2000 to December 2001, she served as Chief Financial Officer
for Rehab Designs of America Corporation, a privately-held
healthcare company (RDA), as part of a turn-around
project completed in December 2001. RDA filed a voluntary
bankruptcy petition under Chapter 11 of the federal
bankruptcy laws in February 2001. Ms. Force was employed by
Vencor, Inc. (Vencor) from 1989 to 1999, most
recently as Senior Vice President, General Counsel and Corporate
Secretary. Vencor filed a voluntary bankruptcy petition under
Chapter 11 of the federal bankruptcy laws in September 1999.

Mr. Patrick B. McGinnis





Since 1997, Mr. McGinnis has served as Chairman, Chief
Executive Officer, and a director of the Company. In 1988,
Mr. McGinnis left Humana Inc., where he served as Vice
President  Finance & Planning, to co-found
the Company. He served as the Companys Chief Executive
Officer until August 1996, when he left the Company to become
President of the Medaphis Healthcare Information Technology
Company. He rejoined the Company and assumed his current
responsibilities in January 1997.

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Director Independence

The Company believes that independent directors play an
important role in maintaining investor confidence and in
assuring fair and impartial management of the Company in the
best interests of its stockholders. The Board has determined
that each of the following directors is an independent
director, as such term is defined in Rule 4200(a)(15)
of the National Association of Securities Dealers (the
NASD):



| |                        
| | -----------------------
| | William C. Ballard, Jr.
| | Jill L. Force          
| | John H. Newman         
| | Lauren N. Patch        
| | Chris B. Van Arsdel    

The Board has also determined that each member of the Audit
Committee, the Compensation and Nominating Committee and the
special committee of the Board meets the independence
requirements applicable to those committees prescribed by the
NASD, the SEC and the Internal Revenue Service.

Audit Committee; Audit Committee Financial Expert

The Company has an Audit Committee of the Board which is
composed of Jill L. Force, Chairperson, Lauren N.
Patch, and Chris B. Van Arsdel. The Board has determined
that Jill L. Force, a member of the Audit Committee of the
Board, is an audit committee financial expert as
such term is defined in Item 401(h) of Regulation S-K
promulgated by the SEC. Each Audit Committee member meets the
NASDs financial knowledge requirements, and Ms. Force
meets the NASDs professional experience requirements as
well. The Audit Committee operates pursuant to a written
charter, which complies with the applicable requirements of the
Sarbanes-Oxley Act of 2002 and related rules of the SEC and the
NASD.

EXECUTIVE OFFICERS

|                    |  |     |    |          |  |                                                                                                    |  |  |      | 
|------------------- |  | --- | -- | -------- |  | -------------------------------------------------------------------------------------------------- |  |  | ---- | 
|                    |  |     |    |          |  | Executive                                                                                         
|Name                |  | Age |    | Position |  | Officer Since                                                                                     
|                    |  |     |    |          |  |                                                                                                   
|Patrick B. McGinnis |  |     | 56 |          |  | Chairman of the Board, Chief Executive
    Officer & Director                                      |  |  | 1997 | 
|                   
|                   
|                   
|                   
|Robert G. Bader, Jr |  |     | 47 |          |  | Executive Vice President  Healthcare
    Sales, Marketing & Corporate Client Solutions            |  |  | 1998 | 
|                   
|                   
|                   
|                   
|Mark J. Bates       |  |     | 44 |          |  | Executive Vice President  Healthcare
    Recoveries Division Overpayments                         |  |  | 1998 | 
|                   
|                   
|                   
|                   
|Robert L. Jefferson |  |     | 48 |          |  | Senior Vice President  TransPaC
    Solutions                                                     |  |  | 1999 | 
|                   
|                   
|                   
|                   
|Debra M. Murphy     |  |     | 48 |          |  | Executive Vice President  Healthcare
    Recoveries Division, Subrogation                         |  |  | 1997 | 
|                   
|                   
|                   
|                   
|Douglas R. Sharps   |  |     | 50 |          |  | Executive Vice President 
    Finance & Administration, Chief Financial Officer and
    Secretary |  |  | 1997 | 

Patrick B. McGinnisserves as Chairman, Chief
Executive Officer and a director of the Company. In 1988,
Mr. McGinnis left Humana Inc., where he served as Vice
President  Finance & Planning, to co-found
the Company. He served as the Companys Chief Executive
Officer until August 1996, when he left to become President of
Medaphis Healthcare Information Technology Company, which
provides a variety of

67



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##### Table of Contents





Robert G. Bader, Jr.serves as Executive Vice
President  Healthcare Sales, Marketing &
Corporate Client Solutions. He assumed his current
responsibilities in December 2002. Beginning in November 1999,
he served as Executive Vice President  Overpayments
Operations. Mr. Bader joined the Company in January 1998 as
Senior Vice President  Business Development. From
1992 until 1994, Mr. Bader served as Vice President of
Strategic Planning of Blue Cross Blue Shield of Kentucky. In
1994, he assumed the positions of Chief Operating and Chief
Financial Officer of Acordia of Louisville, one of the operating
companies of Acordia, Inc., which was a publicly traded
insurance brokerage and health administrative services company
until it was wholly acquired by Anthem, Inc. in 1997.

Mark J. Batesserves as Executive Vice
President  Healthcare Recoveries Division
Overpayments. He assumed his current responsibilities in
December 2003. Mr. Bates joined the Company in June 1998 as
Senior Vice President  Troveris. Before joining the
Company, Mr. Bates was Director of Application Development
at Humana Inc. In his 14 years at Humana Inc., he held a
variety of systems management responsibilities, including
Director of Technical Services, Director of Customer Service,
and Director of Development Support. Mr. Bates is a 1981
graduate of Rose-Hulman Institute of Technology with a B.S. in
Computer Science. He is a founding member of the Computer
Information Systems Corporate Partner Program at the University
of Louisville School of Business.

Robert L. Jeffersonserves as Senior Vice
President  TransPaC Solutions. He assumed his current
responsibilities in November 2000 after having served as Senior
Vice President  Business Development since joining
the Company in November 1999. From 1994 through 1999, he served
as Director of Planning and Budget for AEGON USA, the domestic
insurance division of AEGONs international operations.
During the period of 1979 through 1994, he headed up financial
reporting and budgeting for the Agency Group division of
Providian Corporation, which was subsequently acquired by AEGON.

Debra M. Murphyserves as Executive Vice
President  Healthcare Recoveries Division,
Subrogation. Ms. Murphy joined the Company in 1991 as Sales
and Marketing Manager. She was promoted to Director of Sales in
October 1994, to Vice President  Sales in February
1996, to Senior Vice President in November 1996, to Executive
Vice President  Operations in June 1998 and Executive
Vice President  HRI Division in October 1999. She
assumed her current responsibilities as Executive Vice
President  Healthcare Recoveries Division,
Subrogation in January 2002.

Douglas R. Sharpsserves as Executive Vice
President  Finance & Administration, Chief
Financial Officer and Secretary. Mr. Sharps joined the
Company in January 1990 as Vice President and General Counsel
and became Chief Financial Officer in October 1994. He is also
the principal of Sharps & Associates, PSC, a law firm
that provides support to the Company and handles litigated
recoveries in California, Florida, Illinois, Kentucky, Texas,
Virginia and Wisconsin. He assumed his current responsibilities
in January 1997.

Code of Ethics

SEC rules require the Company to disclose whether or not it has
adopted a code of ethics for its principal executive officer,
principal financial officer, principal accounting officer or
controller, or persons performing similar functions, and to
disclose any amendments to or waivers from such code affecting
such officers. NASD rules require the Company to adopt a code of
conduct applicable to all directors, officers and employees that
must be publicly available and must comply with the SECs
requirements for the code of ethics. The Board is committed to
maintaining high standards of corporate governance, but, in
light of the pendency of the Proposed Transaction, it has not
adopted a formal code of ethics or code of conduct. In the event
that the Proposed Transaction is not consummated, the Board will
adopt such codes to comply with the SEC and NASD rules by a date
no later than the date of its 2004 annual meeting.

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Section 16(a) Beneficial Ownership Reporting
Compliance

Section 16(a) of the Securities Exchange Act of 1934, as
amended (the Exchange Act), requires the
Companys officers, directors and persons who own more than
ten percent (10%) of the Common Stock to file with the SEC
certain reports with respect to each such persons
beneficial ownership of the Common Stock. Based solely upon a
review of the copies of such reports furnished to it and certain
representations of such persons, the Company believes that all
such persons complied with the applicable reporting requirements
during 2003 with the exception of one late Form 3 filing
for Mr. Robert T. Longshore, a former executive
officer of the Company as of January 2, 2003, relating to
options granted to him in connection with his election as an
executive officer of the Company.






|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation

EXECUTIVE COMPENSATION

The following table provides certain summary information
concerning compensation paid or accrued by the Company to or on
behalf of the Companys Chief Executive Officer and the
four other most highly compensated executive officers of the
Company (the Named Executive Officers) for the year
ended December 31, 2003.

Summary Compensation Table

|                            |                                    |      |      |            |  |           |         |              |  |              |        |         |        |   |        |   |  |   |        |        | 
|--------------------------- | ---------------------------------- | ---- | ---- | ---------- |  | --------- | ------- | ------------ |  | ------------ | ------ | ------- | ------ | - | ------ | - |  | - | ------ | ------ | 
|                            |                                    |      |      |            |  |           |         | Other Annual |  | All Other   
|                            |                                    |      |      |            |  |           |         | Compensation |  | Compensation
|Name and Principal Position |                                    | Year |      | Salary ($) |  | Bonus ($) |         | ($)(1)       |  | ($)(2)      
|                            |                                    |      |      |            |  |           |         |              |  |             
|Patrick B. McGinnis         |                                    |      | 2003 |            |  | $         | 325,000 |              |  | $            | 0      |         |        | $ | 21,628 |   |  | $ | 18,489 |       
|                            | Chairman, Chief Executive          |      |      | 2002       |  |           |         | 238,007      |  |              |        | 419,318 | (3)(4) |   |        | 0 |  |   |        | 15,807 | 
|                            | Officer, Director                  |      |      | 2001       |  |           |         | 231,750      |  |              |        | 39,411  | (3)    |   |        | 0 |  |   |        | 14,029 | 
|                           
|                           
|                           
|                           
|Robert G. Bader, Jr.        |                                    |      | 2003 |            |  |           | 170,000 |              |  |              | 34,660 |         |        |   | 5,544  |   |  |   | 16,401 |       
|                            | Executive Vice President          |      |      | 2002       |  |           |         | 149,919      |  |              |        | 106,954 |        |   |        | 0 |  |   |        | 14,018 | 
|                            | Healthcare Sales, Marketing &      |      |      | 2001       |  |           |         | 144,200      |  |              |        | 15,381  |        |   |        | 0 |  |   |        | 14,375 | 
|                            | Corporate Client Solutions         |      |      |            |  |           |         |              |  |              |        |         |        |   |        |   |  |   |        |        | 
|                           
|                           
|                           
|                           
|Douglas R. Sharps           |                                    |      | 2003 |            |  |           | 165,000 |              |  |              | 40,000 |         |        |   | 11,989 |   |  |   | 12,215 |       
|                            | Executive Vice President  Finance |      |      | 2002       |  |           |         | 149,502      |  |              |        | 74,879  |        |   |        | 0 |  |   |        | 14,375 | 
|                            | & Administration, Chief Financial  |      |      | 2001       |  |           |         | 144,200      |  |              |        | 19,242  |        |   |        | 0 |  |   |        | 14,375 | 
|                            | Officer and Secretary              |      |      |            |  |           |         |              |  |              |        |         |        |   |        |   |  |   |        |        | 
|                           
|                           
|                           
|                           
|Debra M. Murphy             |                                    |      | 2003 |            |  |           | 151,055 |              |  |              | 49,034 |         |        |   | 4,163  |   |  |   | 10,958 |       
|                            | Executive Vice President          |      |      | 2002       |  |           |         | 148,093      |  |              |        | 56,967  |        |   |        | 0 |  |   |        | 13,830 | 
|                            | Healthcare Recoveries Division,    |      |      | 2001       |  |           |         | 144,200      |  |              |        | 21,172  |        |   |        | 0 |  |   |        | 14,084 | 
|                            | Subrogation                        |      |      |            |  |           |         |              |  |              |        |         |        |   |        |   |  |   |        |        | 
|                           
|                           
|                           
|                           
|Mark J. Bates               |                                    |      | 2003 |            |  |           | 151,055 |              |  |              | 0      |         |        |   | 7,666  |   |  |   | 11,434 |       
|                            | Executive Vice President          |      |      | 2002       |  |           |         | 148,093      |  |              |        | 40,246  |        |   |        | 0 |  |   |        | 10,626 | 
|                            | Healthcare Recoveries Division,    |      |      | 2001       |  |           |         | 144,200      |  |              |        | 15,863  |        |   |        | 0 |  |   |        | 13,294 | 
|                            | Overpayments                       |      |      |            |  |           |         |              |  |              |        |         |        |   |        |   |  |   |        |        | 



---



|    |                                                                                                                                                                                                                                                                                                                                        
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Other Annual Compensation for 2003 includes contributions to the
    Executive Deferred Compensation Plan.                                                                                                                                                                                                                             
|   
|(2) | All Other Compensation for 2003, 2002 and 2001 includes amounts
    paid by the Company for matching 401(k) plan contributions and
    insurance premiums.                                                                                                                                                                             
|   
|(3) | Since June 30, 2000, 50% of the amount otherwise payable to
    Mr. McGinnis under the Companys Management Group
    Incentive Compensation Plan has been deferred under the Deferred
    Compensation Agreement between Mr. McGinnis and the
    Company. See Employment Agreements. In 2002, the
    deferred amount was $109,659.

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|    |                                                                                                                                                                 
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
|(4) | Includes payment of a $200,000 signing bonus to
    Mr. McGinnis in conjunction with the execution of his
    employment agreement. See Employment Agreements.

STOCK OPTION GRANTS

No options were granted during 2003 to the Named Executive
Officers.

STOCK OPTION EXERCISES

None of the Named Executive Officers exercised any options
during fiscal 2003. The table below shows the number of shares
of Common Stock covered by both exercisable and unexercisable
stock options held by the Named Executive Officers as of
December 31, 2003. The table also reflects the value for
in-the-money options based on the positive spread between the
exercise price of such options and the last reported sale price
of $6.63 of the Common Stock on December 31, 2003, the last
trading date in 2003 for the Common Stock.

FISCAL YEAR-END OPTION VALUES

|                     |  |                        |         |                             |  |             |        |               |  |   |         |  |  |   |         | 
|-------------------- |  | ---------------------- | ------- | --------------------------- |  | ----------- | ------ | ------------- |  | - | ------- |  |  | - | ------- | 
|                     |  |                        |         |                             |  |            
|                     |  | Number of Securities   |         |                            
|                     |  | Underlying Unexercised |         | Value of Unexercised In the
|                     |  | Options at             |         | Money Options at           
|                     |  | December 31, 2003      |         | December 31, 2003          
|                     |  |                        |         |                            
|Name                 |  | Exercisable            |         | Unexercisable               |  | Exercisable |        | Unexercisable
|                     |  |                        |         |                             |  |             |        |              
|Patrick B. McGinnis  |  |                        | 386,000 |                             |  |             | 64,000 |               |  | $ | 432,180 |  |  | $ | 231,320 | 
|                    
|                    
|                    
|                    
|Robert G. Bader, Jr. |  |                        | 110,000 |                             |  |             | 30,000 |               |  |   | 215,897 |  |  |   | 108,431 | 
|                    
|                    
|                    
|                    
|Mark J. Bates        |  |                        | 120,000 |                             |  |             | 30,000 |               |  |   | 215,897 |  |  |   | 108,431 | 
|                    
|                    
|                    
|                    
|Debra M. Murphy      |  |                        | 175,000 |                             |  |             | 30,000 |               |  |   | 215,897 |  |  |   | 108,431 | 
|                    
|                    
|                    
|                    
|Douglas R. Sharps    |  |                        | 163,750 |                             |  |             | 30,000 |               |  |   | 215,897 |  |  |   | 108,431 | 

Directors Compensation

The Company pays its non-employee directors an annual retainer
in the amount of $15,000 ($17,000 for committee chairpersons)
plus $1,500 for attendance (in person or by telephone) at each
meeting of the Board and at each meeting of a committee of the
Board (other than the special committee) that does not coincide
with a meeting of the full Board, with one-third of the annual
retainer paid in Common Stock pursuant to the Companys
Outside Directors Equity Compensation Plan (the 2002
Outside Directors Stock Plan). In 1998, the Company
adopted the 1998 Deferred Compensation Plan for Directors (the
Deferred Plan). The Deferred Plan allows a director
to elect to defer the payment of the foregoing fees until after
the earlier of his or her death, resignation, removal or
retirement as a director. To date, there have been no deferrals
under the Deferred Plan.

In June 2003, the Board formed a special committee of the five
non-employee directors for the purpose of investigating
strategic alternatives and taking related actions. At the time
the special committee was formed, the Board also approved the
payment of a fee of $10,000 to each member of the special
committee, with an additional $5,000 for Jill L. Force as
chair, and a fee of $1,000 per meeting of the special committee
attended. The compensation to Ms. Force was increased in
December 2003 by an additional $25,000 to reflect the amount of
time she had committed to the process of investigating strategic
alternatives and negotiating with potential buyers of the
Company. See Recent Developments.

During 2002, the Company granted options to purchase Common
Stock to each non-employee director of the Company under the
2002 Outside Directors Stock Plan. The 2002 Outside Directors
Stock Plan replaced the Companys Amended and Restated
Directors Stock Option Plan (the Directors
Plan), which terminated as to the granting of options on
April 1, 2002. Under the 2002 Outside Directors Stock Plan,
each director automatically is granted an option to purchase
10,000 shares of Common Stock on the effective date of his or
her initial election or appointment as a member of the Board at
an option exercise price equal to the fair market value of a
share of Common Stock on such date. Further, each director
automatically is granted as

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As a further means of aligning directors and
stockholders interests, in December 2000 the Board adopted
resolutions that required non-employee directors to own certain
amounts of Company stock. Each non-employee director is required
to accumulate Common Stock equal in value to one years
annual retainer. Non-employee directors serving on the Board at
the time of adoption had until January 1, 2002 to
accumulate the required stockholdings and newly elected
non-employee directors have one year from their election to
accumulate the required stockholdings. As of March 15,
2004, each of the Companys non-employee directors had
accumulated Common Stock at least equal in value to one
years annual retainer based on the closing price of the
Companys Common Stock as of such date.

EMPLOYMENT AGREEMENTS

Effective January 1, 2003, the Company entered into an
employment agreement with Mr. McGinnis, replacing his prior
employment agreement with the Company originally entered into by
Mr. McGinnis in May 1997. Pursuant to his employment
agreement, Mr. McGinnis serves as Chairman and Chief
Executive Officer of the Company. The employment agreement has
an initial term of three years and renews automatically for
subsequent two-year periods, unless a notice of termination is
delivered by either party at least sixty days prior to the end
of the initial term or the end of a renewal term.

Under the terms of the employment agreement, Mr. McGinnis
is entitled to a minimum base salary of $325,000, subject to
annual percentage increases for inflation equivalent to those
increases given in the normal course of business to Company
employees on substantially a Company-wide basis. In addition,
Mr. McGinniss employment agreement entitles him to
participate in the Companys Management Group Incentive
Compensation Plan, to receive such awards of stock options as
determined by the Companys Compensation and Nominating
Committee and to receive such fringe benefits as the Company may
provide from time to time to its executive employees, including,
group health insurance, life insurance, and disability
insurance. Further, Mr. McGinnis received a bonus of
$200,000 in conjunction with signing his employment agreement.
The bonus is subject to reimbursement by Mr. McGinnis to
the Company if Mr. McGinnis terminates his employment with
the Company during the initial three-year term of his employment
as follows: (i) if such termination occurs prior to
January 1, 2004, Mr. McGinnis is required to reimburse
the entire $200,000 signing bonus; (ii) if such termination
occurs on or after January 1, 2004 but prior to
January 1, 2005, Mr. McGinnis is required to reimburse
$133,334 to the Company; and (iii) if such termination
occurs on or after January 1, 2005 but prior to
January 1, 2006, Mr. McGinnis is required to reimburse
$66,667 to the Company.

The Company may terminate the employment agreement and all of
its obligations thereunder if Mr. McGinnis
(i) materially breaches any term of the employment
agreement and fails to cure such breach within ten days after
written notice of such breach from the Board (no cure period is
permitted for breaches of certain confidentiality and noncompete
provisions contained in the employment agreement in favor of the
Company), (ii) commits any other act in bad faith
materially detrimental to the business or reputation of the
Company, or (iii) engages in illegal activities or is
convicted of any felony involving fraud, deceit, or moral
turpitude. The Companys obligations under the employment
agreement to pay salary, provide for the continued vesting of
stock option awards, and provide for health insurance benefits
continue for the greater of the remainder of the renewal term or
two years if the Company terminates the employment agreement for
any reason other than (i)-(iii) above, or if Mr. McGinnis
terminates the agreement for one of the following reasons
(i) the Company materially breaches any term of the
employment agreement and fails to cure such breach within ten
days after written notice of such breach from Mr. McGinnis,
(ii) the Company assigns Mr. McGinnis duties, or
significantly reduces his assigned duties, in a manner
inconsistent with his position

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In addition, on June 30, 2000, pursuant to Board
authorization and in accordance with the terms of an Amended
Promissory Note (see Certain Relationships and Related
Transactions for a description of the Amended Promissory
Note), the Company and Mr. McGinnis entered into a deferred
compensation agreement (the Deferred Compensation
Agreement). Under the Deferred Compensation Agreement, 50%
of the amount otherwise payable to Mr. McGinnis under the
Companys Management Group Incentive Compensation Plan is
to be deferred until the Amended Promissory Note is paid in
full, with such deferred compensation then being paid in full to
Mr. McGinnis within 30 days thereafter. The Company
has full right of set-off against any deferred compensation
under the Deferred Compensation 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
February 29, 2004, the amount of deferred compensation was
$182,013, with accrued interest of $21,398.

The Company has entered into severance agreements (the
Severance Agreements) with Ms. Murphy and
Messrs. Bader, Bates, Jefferson and Sharps, which provide
that in the event that such executive officer is terminated by
the Company without Cause (as such term is defined
in the Severance Agreements), the Company would continue to pay
that executive officer his or her base salary in effect on the
date of termination for a period of one year following the day
on which the termination occurs (Severance Pay) and
for a period of one year from the date of termination, pay, or
reimburse such executive officer for, the Company-paid portion
of medical premiums under the Companys group health plan
that would apply to such executive officer had he or she not
been terminated, provided that the executive officer makes a
timely election of such continuation coverage under COBRA.
Severance Pay would be paid and delivered to the executive
officer on the same basis that the executive officers
regular base salary was paid and delivered prior to termination,
would be reduced to the extent the executive officer receives
compensation as an employee from an entity other than the
Company during the one-year period following termination, and
would not include any amounts of incentive compensation.

In addition, the Severance Agreements provide that if the
executive officer is terminated or voluntarily terminates
employment for Good Reason (as such term is defined
in the Severance Agreements) within two years following a
Change in Control (as such term is defined in the
Severance Agreements), the Company would make a Change in
Control Payment to the executive officer, provided the
executive officer is employed by the Company on the date of the
Change in Control and was a member of the Companys
Management Group (as defined by the Board) prior to
the execution of a definitive agreement, if any, between the
Company and any entity to be combined with the Company in
connection with a Change in Control. The amount of the Change in
Control Payment would be equal to one year of salary and one
year of benefits continuation if the executive officer were a
member of the Management Group for three years or less on the
date of the Change in Control, and equal to two years of salary
and two years of benefits continuation if the executive officer
were a member of the Management Group for more than three years
on the date of the Change in Control. In both cases, the Change
in Control Payment would be paid as salary continuation in
accordance with the payment provisions relating to Severance
Pay. The Severance Agreements preclude payment of Severance Pay
if such executive officer is entitled to a Change in Control
Payment. The Severance Agreements also contain certain
confidentiality, noncompete and nonsolicitation provisions in
favor of the Company and provide that nothing contained therein
shall be deemed to alter the executive officers at
will employment by the Company.

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COMPENSATION COMMITTEE INTERLOCKS AND INSIDER
PARTICIPATION

William C. Ballard, Jr., Chairperson, John H.
Newman and Lauren N. Patch currently serve on the
Compensation and Nominating Committee. None of the members of
the Compensation and Nominating Committee were officers of the
Company or had any relationship requiring disclosure under NASD
or SEC regulations.

BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE
COMPENSATION

The Company has combined its nominating and compensation
committees into the Compensation and Nominating Committee (the
Compensation Committee). The Compensation Committee,
among other things, approves base salaries of executive
officers, approves the terms of annual incentive or bonus plans
in which executive officers participate and reviews and makes
recommendations to the Board concerning approval and adoption of
and amendments to stock-based compensation plans. The
Compensation Committee is composed of William C.
Ballard, Jr., Chairperson, John H. Newman and
Lauren N. Patch, who are all non-employee members of the
Board.

Currently, the Chief Executive Officer, Mr. Patrick B.
McGinnis, is a party to an employment agreement that provides
for his participation in the Management Group Incentive
Compensation Plan, and to a deferred compensation agreement
under which 50% of the amount otherwise payable to
Mr. McGinnis under the Management Group Incentive
Compensation Plan is deferred. In addition, each of the other
executive officers of the Company is a party to a severance
agreement. See Employment Agreements.

Compensation Components. The components of the
Companys executive compensation program consist of base
salaries, cash bonuses and stock options. The Companys
compensation program is designed to provide competitive base
salaries for the Companys executive officers, and
incentive compensation and long-term incentives that retain the
executive officers and motivate them to achieve the
Companys business objectives over the long-term.

Management Group Incentive Compensation Plan. The Company
has annually adopted a performance-based bonus plan. The plan
typically creates a nondiscretionary bonus pool and a
discretionary bonus pool from which cash bonuses are paid to its
participants based on performance-based thresholds set forth in
the plan, the discretion of the Board of Directors and each
participants achievement of annual goals. Near the
beginning of each year, the Compensation Committee approves
these goals for each participant in the plan for that year.
After the end of each year, based on its evaluation of the Chief
Executive Officers performance in achieving his goals for
the year and attaining the Companys financial results, the
Compensation Committee may then grant Mr. McGinnis an
annual bonus from the discretionary bonus pool. Mr. McGinnis
recommends to the Compensation Committee the discretionary
annual bonus for the executive officers based on each executive
officers performance for the year, as well as the
Companys financial results. In 2003, the participants in
the plan were Messrs. McGinnis, Bader, Bates, Jefferson and
Sharps and Ms. Murphy.

Stock Option Plans. The Company maintains stock option
plans designed to align executives and stockholders
interests in the enhancement of stockholder value. Stock options
are granted under these plans to certain officers, key employees
and consultants of the Company by the Compensation Committee.
Stock options may be granted annually if available and if
supported by the Companys growth, profitability, retention
goals, and related compensation concerns. To foster long-term
commitments, executives options typically vest over a
period of at least three years (the Companys most recent
grants of options in 2000 vest over a five-year period) and
remain outstanding for ten years. In accordance with United
States Treasury Department regulations, in the event the value
realized upon the exercise of options by any covered
employee (the difference between the per share exercise price
and the market price on the date of exercise multiplied by the
number of options exercised) when combined with such
employees other covered compensation in the
year of exercise exceeds $1.0 million, the Company will be
unable to deduct the amount of such excess compensation.

Required Stockholdings. As a further means of aligning
executives and stockholders interests in the
enhancement of stockholder value, the Compensation Committee has
put in place stock ownership require-

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Supplemental Retirement Savings Plan. The Company has
adopted a non-qualified deferred compensation plan under which
certain key employees of the Company may defer up to 85% of
their compensation (reduced by the amount they could have
deferred under the Companys 401(k) Plan). The Company
matches employee contributions equal to the contributions that
would have been made under the Companys 401(k) Plan but
for certain tax restrictions. Participants are entitled to
receive distributions upon termination of employment. The
Company may fund all or part of its obligations under this plan
in a trust reachable by the Companys general creditors.

Executive Compensation Plan. In 2002, after the
Compensation Committee conferred with William M. Mercer,
Incorporated (Mercer) concerning executive
compensation and retention, the Company adopted the Trover
Solutions, Inc. Executive Compensation Plan, effective
January 1, 2003. The purpose of the Executive Compensation
Plan is to assist the Company in attracting and retaining
management group members by providing a reward for performance
and incentive for future endeavors. The participants in this
plan in 2003 were Messrs. McGinnis, Bader, Bates, Jefferson
and Sharps and Ms. Murphy, who together constitute the
Companys management group. The Executive Compensation Plan
provides that the Company will make a quarterly funded
contribution for each participant in the plan based on a
percentage of that participants annual compensation, the
percentage being adjusted for the participants age. This
contribution is reduced by the amount of the employer match made
by the Company on behalf of the participant to the
Companys Retirement Savings Plan and Supplemental
Retirement Savings Plan for the applicable period. The
contributions vest ratably over a five-year period.

Deductibility of Certain Compensation.
Section 162(m) of the Internal Revenue Code of 1986, as
amended, generally disallows tax deductions to publicly held
corporations for compensation in excess of $1 million per
employee in any taxable year that is paid to the
corporations chief executive officer or to its four other
most highly compensated executive officers. No executive officer
received more than $1 million in compensation in 2002.

Chief Executive Officer Compensation. In December 2002,
after consultation with Mercer, the Company entered into an
employment agreement with Mr. McGinnis effective
January 1, 2003 (the Employment Agreement) with
an initial term of three years and renewing automatically for
subsequent two year periods, unless a notice of termination is
delivered by either party at least sixty days prior to the end
of the initial term or the end of a renewal term. The Employment
Agreement contains certain confidentiality and noncompete
provisions. Pursuant to the Employment Agreement,
Mr. McGinnis is entitled to receive a minimum base salary
of $325,000, subject to annual percentage increases for
inflation equivalent to those increases given in the normal
course of business to Company employees on substantially a
Company-wide basis. In addition, the Employment Agreement
entitles Mr. McGinnis to participate in the Companys
Management Group Incentive Compensation Plan, to receive such
awards of stock options as determined by the Compensation
Committee and to receive such fringe benefits as may be provided
from time to time by the Company to its executive employees,
including group health insurance, life insurance and disability
insurance. In conjunction with his execution of the Employment
Agreement, Mr. McGinnis received a signing bonus of
$200,000, subject to reimbursement by Mr. McGinnis of all
or a portion of such amount if Mr. McGinnis terminates his
employment with the Company during the initial three-year term
of his employment. See Employment Agreements.

The Compensation Committee determines the amount of
discretionary bonuses that Mr. McGinnis receives under the
Management Group Incentive Compensation Plan, based on his
performance with respect

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In addition, to augment Mr. McGinniss long-term
incentive for continued employment with the Company,
Mr. McGinnis has been granted options to acquire shares of
the Common Stock under the Companys Option Plan and Stock
Option Plan.



| |                                     
| | ------------------------------------
| | COMPENSATION AND NOMINATING         
| | COMMITTEE                           
|
| | William C. Ballard, Jr., Chairperson
| | John H. Newman                      
| | Lauren N. Patch                     

March 19, 2004

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AUDIT COMMITTEE REPORT

The Audit Committee reviews the Companys financial
reporting process on behalf of the Board of Directors.
Management is responsible for the Companys financial
reporting processes, including specifically its system of
internal control, and for the preparation of all financial
statements in conformity with accounting principles generally
accepted in the United States of America. The Companys
independent auditors, PricewaterhouseCoopers LLP, are
responsible for reviewing the Companys quarterly financial
statements and auditing the Companys annual financial
statements and for expressing an opinion on the conformity of
the audited financial statements with accounting principles
generally accepted in the United States of America. The Audit
Committee consists of Jill L. Force, Lauren N. Patch, and Chris
B. Van Arsdel.

Members of the Audit Committee rely, without independent
verification, on the information provided to them and on the
representations made by management and the opinions and
communications of the Companys independent auditors.
Accordingly, the Audit Committees activities do not assure
that the audit of the Companys financial statements has
been carried out in accordance with generally accepted auditing
standards, that the financial statements are presented in
accordance with accounting principles generally accepted in the
United States of America or that the Companys independent
auditors are in fact independent.

In this context:



| |   |                                                                                                                                                                                                                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The Audit Committee reviewed and discussed the audited financial
    statements contained in the Companys 2003 Annual Report on
    Form 10-K with the Companys management and the
    independent auditors prior to the filing of the Form 10-K
    with the Securities and Exchange Commission (the
    Commission).                      
|
| |  | The Audit Committee reviewed and discussed the unaudited
    financial statements contained in the Companys Quarterly
    Reports on Form 10-Q for each of the quarters ended in 2003
    with the Companys management and the independent auditors
    prior to the filing thereof with the Commission.                                      
|
| |  | The Audit Committee reviewed and discussed with the independent
    auditors the matters required to be discussed by Statement on
    Auditing Standards No. 61 (Communications with Audit
    Committees).                                                                                                                                     
|
| |  | The Audit Committee received from the independent auditors
    written disclosures regarding the accountants
    independence, as required by Independence Standards Board
    Standard No. 1 (Independence Discussions with Audit
    Committees), and discussed with the auditors their independence
    from the Company and its management.

In reliance on the reviews and discussions noted above and
subject to the limitations set forth above, the Audit Committee
recommended to the Board of Directors (and the Board approved)
that the audited financial statements be included in the
Companys Annual Report on Form 10-K for the year
ended December 31, 2003, for filing with the Commission.



| |                           
| | --------------------------
| | AUDIT COMMITTEE           
|
| | Jill L. Force, Chairperson
| | Lauren N. Patch           
| | Chris B. Van Arsdel       

March 19, 2004

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STOCK PRICE PERFORMANCE GRAPH

The graph below reflects the cumulative stockholder return
(assuming reinvestment of dividends) on the Common Stock
compared to the return of the Center for Research in Security
Price Total Return Index for The Nasdaq Stock Market, U.S.
Companies (the Nasdaq Composite, U.S.) and the
Companys peer group index for the periods indicated. This
graph reflects the investment of $100.00 on December 31,
1998 in the Common Stock, the Nasdaq Composite, U.S., the
Companys 2002 peer group and the Companys 2003 peer
group. The Companys 2003 peer group consists of the
following companies: CCC Information Services Group, CorVel
Corporation (CorVel), Health Management Systems,
Inc., Maximus, Inc., National Research, Inc., and Profit
Recovery Group International. QuadraMed Corporation was removed
from the 2003 peer group as it was delisted from the NASDAQ
market on March 4, 2003. The companies constituting the
Companys 2003 and 2002 peer group were selected based on
business model, product market and market capitalization.

ANNUAL VALUES

(GRAPH)

The stock price performance graph shall not be deemed
incorporated by reference by any general statement incorporating
by reference this Annual Report on Form 10-K into any
filing under the Securities Act of 1933, as amended, or under
the Securities Exchange Act of 1934, as amended (together, the
Acts), except to the extent that the Company
specifically incorporates this information by reference, and
shall not otherwise be deemed filed under such Acts.






|         |                                                                                                   
|-------- | --------------------------------------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial Owners and
    Management and Related Stockholder Matters

Changes in Control

On February 20, 2004, the Company announced that it had
entered into a definitive agreement to be acquired in an
all-cash transaction in which TSI Acquisition Co., Inc., a
wholly-owned subsidiary of TSI

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If completed, the Proposed Transaction will constitute a going
private transaction and will result in the Company no longer
being publicly traded and no longer filing annual, quarterly and
current reports with the Securities and Exchange Commission
(SEC). The Proposed Transaction must be approved by
the Companys stockholders at a special meeting of the
stockholders, which the Company expects will occur in the second
quarter of 2004. The Proposed Transaction is also subject to
customary closing conditions. The obligation of Tailwind to
proceed under the definitive agreement expires if the Company is
unable to close the Proposed Transaction by July 15, 2004.
More information on the Proposed Transaction is included in the
proxy statement that the Company will mail to its stockholders
in connection with the special meeting of the stockholders at
which the Proposed Transaction will be voted on.

The Company has been informed by Tailwind that neither it nor
any of its affiliates owns any securities of the Company or any
rights to acquire securities of the Company other than pursuant
to the definitive agreement through which the Proposed
Transaction may be effected.

EQUITY COMPENSATION PLAN INFORMATION

The following table sets forth information as of
December 31, 2003 with respect to shares of Common Stock to
be issued upon the exercise, and the weighted-average exercise
price, of all outstanding options and rights granted under the
Companys equity compensation plans, as well as the number
of shares available for future issuance under such plans.

|                                                                  |       |                                   |           |                      |  |                                 |      |      |  |  |         |         | 
|----------------------------------------------------------------- | ----- | --------------------------------- | --------- | -------------------- |  | ------------------------------- | ---- | ---- |  |  | ------- | ------- | 
|                                                                  |       |                                   |           |                      |  | Number of Securities Remaining 
|                                                                  |       |                                   |           | Weighted-Average     |  | Available for Future Issuance  
|                                                                  |       | Number of Securities to be Issued |           | Exercise Price of    |  | Under Equity Compensation Plans
|                                                                  |       | Upon Exercise of Outstanding      |           | Outstanding Options, |  | (Excluding Securities          
|Plan Category                                                     |       | Options, Warrants and Rights      |           | Warrants and Rights  |  | Reflected in Column (a))       
|                                                                  |       |                                   |           |                      |  |                                
|                                                                  |       | (a)                               |           | (b)                  |  | (c)                            
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Equity Compensation Plans Approved by Security
    Holders(1)     |       |                                   | 2,105,955 | (2)                  |  | $                               | 9.03 |      |  |  | 718,390 |        
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Equity Compensation Plans Not Approved by
    Security Holders(3) |       |                                   | N/A       | (3)                  |  |                                 | N/A  | (3)  |  |  | 6,000   | (3)    
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  | Total |                                   |           | 2,105,955            |  |                                 | $    | 9.03 |  |  |         | 724,390 | 






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Equity compensation plans approved by security holders are the
    2002 Outside Directors Stock Plan, the Directors Plan, the
    Non-Qualified Stock Option Plan for Eligible Employees (the
    Employees Plan), the 1997 Stock Option Plan for
    Eligible Participants and the Employee Stock Purchase Plan. The
    2002 Outside Directors Stock Plan was approved by the
    Companys stockholders at the Companys 2002 annual
    meeting of stockholders held on May 10, 2002. The 1997
    Stock Option Plan for Eligible Participants was originally
    approved by the Companys stockholders at a special meeting
    of stockholders held on December 8, 1997, and subsequently
    amended at the Companys 1999 annual meeting of
    stockholders held on May 3, 1999, to increase the number of
    shares of Common Stock reserved for issuance under the Stock
    Option Plan from 860,000 to 1,760,000. The Directors Plan,
    the Employees Plan and the Employee Stock Purchase Plan were
    each approved by the Companys sole stockholder, Medaphis
    Corporation, prior to the completion of the Companys
    initial public offering on May 22, 1997.

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|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Excludes an aggregate of 6,650 shares of Common Stock
    issued to non-employee directors as partial payment of their
    annual retainer under the 2002 Outside Directors Stock Plan and
    an aggregate of 117,544 shares of Common Stock issued under
    the Employee Stock Purchase Plan.                                                                                                                                                             
|(3) | The only equity compensation plan not approved by security
    holders is a restricted stock award (the Restricted Stock
    Award) granted to Thomas Quinn on March 1, 2002 as an
    inducement to Mr. Quinn to enter into employment with the
    Company. Pursuant to the Restricted Stock Award, Mr. Quinn
    was granted 10,000 shares of Common Stock, vesting annually
    in five equal 2,000 share increments commencing on
    October 1, 2002.

MANAGEMENT COMMON STOCK OWNERSHIP

The following table sets forth certain information regarding the
beneficial ownership of shares of Common Stock as of
March 15, 2004 by (i) the Companys Named
Executive Officers, (ii) each of the Companys
directors and (iii) such directors and all executive
officers as a group.

|                                                                 |  |              |           |            |  |  |      |  
|---------------------------------------------------------------- |  | ------------ | --------- | ---------- |  |  | ---- | -
|                                                                 |  | Shares of    |           |           
|                                                                 |  | Common Stock |           |           
|                                                                 |  | Beneficially |           | Percent of
|Name                                                             |  | Owned(1)     |           | Class(2)  
|                                                                 |  |              |           |           
|Patrick B. McGinnis                                              |  |              | 537,291   | (3)        |  |  | 6.3  | %
|                                                                
|                                                                
|                                                                
|                                                                
|Robert G. Bader, Jr.                                             |  |              | 146,099   | (4)        |  |  | 1.7  | %
|                                                                
|                                                                
|                                                                
|                                                                
|Mark J. Bates                                                    |  |              | 146,359   | (7)        |  |  | 1.7  | %
|                                                                
|                                                                
|                                                                
|                                                                
|Debra M. Murphy                                                  |  |              | 213,917   | (6)        |  |  | 2.5  | %
|                                                                
|                                                                
|                                                                
|                                                                
|Douglas R. Sharps                                                |  |              | 206,854   | (5)        |  |  | 2.4  | %
|                                                                
|                                                                
|                                                                
|                                                                
|William C. Ballard, Jr.                                          |  |              | 60,843    | (8)        |  |  | *    |  
|                                                                
|                                                                
|                                                                
|                                                                
|Jill L. Force                                                    |  |              | 28,343    | (9)        |  |  | *    |  
|                                                                
|                                                                
|                                                                
|                                                                
|John H. Newman                                                   |  |              | 35,843    | (10)       |  |  | *    |  
|                                                                
|                                                                
|                                                                
|                                                                
|Lauren N. Patch                                                  |  |              | 13,510    | (11)       |  |  | *    |  
|                                                                
|                                                                
|                                                                
|                                                                
|Chris B. Van Arsdel                                              |  |              | 26,843    | (12)       |  |  | *    |  
|                                                                
|                                                                
|                                                                
|                                                                
|All executive officers and directors as a group
    (11 persons) |  |              | 1,509,220 |            |  |  | 17.8 | %






| |   |                                                                                            
| | - | -------------------------------------------------------------------------------------------
| | * | Beneficial ownership represents less than 1% of the
    Companys outstanding Common Stock.

| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Under the rules of the Securities and Exchange Commission, a
    person is deemed to be a beneficial owner of a
    security if that person has or shares voting power,
    which includes the power to vote or to direct the voting of such
    security, or investment power, which includes the
    power to dispose of or to direct the disposition of such
    security. A person also is deemed to be a beneficial owner of
    any securities which that person has the right to acquire within
    sixty (60) days. Under these rules, more than one person
    may be deemed to be a beneficial owner of the same securities
    and a person may be deemed to be a beneficial owner of
    securities as of which he or she has no economic or pecuniary
    interest. Except as set forth in the footnotes below, the
    persons named in the table have sole voting and investment power
    with respect to all shares of Common Stock shown as being
    beneficially owned by them. Shares have been rounded to avoid
    listing fractional shares issued in connection with the
    Companys Employee Stock Purchase Plan (the Stock
    Purchase Plan).
| | (2) | Based on an aggregate of 8,494,977 shares of Common Stock issued
    and outstanding as of March 15, 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | (3) | Includes 5,000 shares held by Mr. McGinniss spouse.
    Also includes 418,000 shares that are not currently
    outstanding, but that may be acquired within sixty
    (60) days upon the exercise of stock options granted under
    the Companys Non-Qualified Stock Option Plan for Eligible
    Employees (the Option Plan) and the Companys
    1997 Stock Option Plan for Eligible Participants (the
    Stock Option Plan).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | (4) | Includes 6,300 shares Mr. Bader holds jointly with his
    spouse. Includes 4,025 shares acquired under the Stock
    Purchase Plan. Also includes 125,000 shares that are not
    currently outstanding, but that may be acquired within sixty
    (60) days upon the exercise of stock options granted under
    the Stock Option Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

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| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (5) | Includes 178,750 shares that are not currently outstanding,
    but that may be acquired within sixty (60) days upon the
    exercise of stock options granted under the Option Plan and the
    Stock Option Plan.                                                                                                                                                                                                                                                                                                                                                              
| | (6) | Includes 700 shares which are held by Ms. Murphy as
    trustee for a minor child. Also includes 190,000 shares
    that are not currently outstanding, but that may be acquired
    within sixty (60) days upon the exercise of stock options
    granted under the Option Plan and the Stock Option Plan.                                                                                                                                                                                                                                                                      
| | (7) | Includes 135,000 shares that are not currently outstanding,
    but that may be acquired within sixty (60) days upon the
    exercise of stock options granted under the Stock Option Plan.                                                                                                                                                                                                                                                                                                                                                                                      
| | (8) | Includes 5,000 shares held by Mr. Ballard in a
    charitable remainder trust for the benefit of his son,
    5,000 shares held by Mr. Ballard in a charitable
    remainder trust for the benefit of his daughter and
    10,000 shares held by Mr. Ballard in a charitable
    remainder trust for the benefit of his spouse. Mr. Ballard
    has sole voting power over the shares. Also, includes
    19,336 shares that are not currently outstanding, but that
    may be acquired within sixty (60) days upon the exercise of
    stock options under the Directors Plan.
| | (9) | Includes 19,336 shares that are not currently outstanding,
    but that may be acquired within sixty (60) days upon the
    exercise of stock options under the Directors Plan.                                                                                                                                                                                                                                                                                                                                                                                                 

|     |                                                                                                                                                                                                                                        
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(10) | Includes 15,000 shares owned by Mr. Newmans
    spouse and 19,336 shares that are not currently
    outstanding, but that may be acquired within sixty
    (60) days upon the exercise of stock options under the
    Directors Plan.
|(11) | Includes 8,003 share that are not currently outstanding,
    but may be acquired within sixty (60) days upon the
    exercise of stock options under the Directors Plan.                                                              
|(12) | Includes 19,336 shares that are not currently outstanding,
    but that may be acquired within sixty (60) days upon the
    exercise of stock options under the Directors Plan.                                                       

PRINCIPAL STOCKHOLDERS

The table below sets forth certain information as of
March 15, 2004 concerning persons known to the Board to be
a beneficial owner, as such term is defined by the
rules of the Securities and Exchange Commission, of more than 5%
of the outstanding shares of the Common Stock.

|                               |                                  |              |           |            |  |  |       |  | 
|------------------------------ | -------------------------------- | ------------ | --------- | ---------- |  |  | ----- |  | 
|                               |                                  | Shares of    |           |           
|                               |                                  | Common Stock |           |           
|                               |                                  | Beneficially |           | Percent of
|Name and Address               |                                  | Owned(1)     |           | Class(2)  
|                               |                                  |              |           |           
|                              
|                              
|                              
|                              
|PAR Investment Partners, L.P.  |                                  |              | 1,394,600 | (3)        |  |  | 16.4% | 
|                               | One Financial Center, Suite 1600 |              |           |            |  |  |       |  | 
|                               | Boston, Massachusetts 02111      |              |           |            |  |  |       |  | 
|                              
|                              
|                              
|                              
|FMR Corp.                      |                                  |              | 1,112,500 | (4)        |  |  | 13.1% | 
|                               | 82 Devonshire Street             |              |           |            |  |  |       |  | 
|                               | Boston Massachusetts 02109       |              |           |            |  |  |       |  | 
|                              
|                              
|                              
|                              
|Dimensional Fund Advisors Inc. |                                  |              | 500,400   | (5)        |  |  | 5.9%  | 
|                               | 1299 Ocean Avenue                |              |           |            |  |  |       |  | 
|                               | 11th Floor                       |              |           |            |  |  |       |  | 
|                               | Santa Monica, California 90401   |              |           |            |  |  |       |  | 
|                              
|                              
|                              
|                              
|Heartland Advisors, Inc.       |                                  |              | 603,000   | (6)        |  |  | 7.1%  | 
|                               | 798 North Water Street           |              |           |            |  |  |       |  | 
|                               | Milwaukee, Wisconsin 53202       |              |           |            |  |  |       |  | 
|                              
|                              
|                              
|                              
|Patrick B. McGinnis            |                                  |              | 537,291   |            |  |  | 6.3%  | 
|                               | 1600 Watterson Tower             |              |           |            |  |  |       |  | 
|                               | Louisville, Kentucky 40218       |              |           |            |  |  |       |  | 






|    |                                                                                                           
|--- | ----------------------------------------------------------------------------------------------------------
|(1) | See Note (1) under Management Common Stock
    Ownership herein.                                        
|(2) | Based on an aggregate of 8,494,977 shares of Common Stock
    issued and outstanding as of March 15, 2004.

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|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(3) | The information regarding PAR Investment Partners, L.P.
    (PAR Investment) is given in reliance upon a
    Schedule 13G/A filed with the SEC on February 14, 2003
    by such stockholder, PAR Group, L.P., the general partner
    of PAR Investment (PAR Group), PAR Capital
    Management, Inc., the general partner of PAR Group (PAR
    Capital), and Arthur G. Epker, III
    (Epker). The Schedule 13G/A indicates that PAR
    Investment, PAR Group, PAR Capital and Epker have sole voting
    power and sole dispositive power over 1,394,600 shares.                                                                                               
|(4) | The information regarding FMR Corp. is given in reliance upon a
    Form 13F filed with the SEC on February 17, 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|(5) | The information regarding Dimensional Fund Advisors Inc.
    (Dimensional) is given in reliance upon a
    Schedule 13G/A filed with the SEC on February 6, 2004
    by such stockholder. The Schedule 13G/A indicates that
    Dimensional serves as a registered investment advisor to four
    investment companies and as an investment manager to certain
    other commingled group trusts and separate accounts and that in
    its role as investment adviser or manager, Dimensional possesses
    voting and/or investment power over 500,400 shares. The
    Schedule 13G/A also indicates that Dimensional disclaims
    beneficial ownership of such shares.
|(6) | The information regarding Heartland Advisors, Inc.
    (Heartland) is given in reliance upon a
    Schedule 13G/A filed with the SEC on February 12, 2004
    by such stockholder and William J. Nasgovitz
    (Nasgovitz). The Schedule 13G/A indicates that
    Heartland has sole dispositive power over 603,000 shares.
    The Schedule 13G/A indicates that Nasgovitz has sole voting
    power over 603,000 shares.                                                                                                                                                                                                                                             






|         |                                               
|-------- | ----------------------------------------------
|Item 13. | Certain Relationships and Related Transactions

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

McGinnis Demand Note.On February 12, 1999, the
Board of Directors approved a loan in the amount of $350,000 to
Patrick B. McGinnis, the Chairman and Chief Executive Officer of
the Company, in exchange for a full recourse promissory note in
the same amount from Mr. McGinnis. On June 30, 2000,
at the direction of the Board of Directors and in accordance
with terms authorized by it, the Company loaned
Mr. McGinnis an additional $500,000. Under these terms, the
$500,000 loan to Mr. McGinnis was combined with his
existing debt to the Company of $350,000 of principal and
$36,520 of accrued interest. Mr. McGinnis delivered to the
Company his full recourse promissory note in the amount of
$886,520, bearing interest at a fixed rate of 6.62% per annum
(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
February 29, 2004, the promissory note of $886,520 and
accrued interest of $111,986 were outstanding.

On June 30, 2000, pursuant to Board authorization and in
accordance with the terms of the Amended Promissory Note, the
Company and Mr. McGinnis entered into a Deferred
Compensation Agreement. Under the Deferred Compensation
Agreement, 50% of the amount otherwise payable to
Mr. McGinnis under the Companys Management Group
Incentive Compensation Plan is to be deferred until the Amended
Promissory Note is paid in full, with such deferred compensation
then being paid in full to Mr. McGinnis within 30 days
thereafter. The Company has full right of set-off against any
deferred compensation under the Deferred Compensation 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 February 29, 2004, the amount of deferred compensation
was $182,013, with accrued interest of $21,398.

Sharps & Associates.As part of its obligations under
client contracts, the Company generally pays for the legal
representation of clients, as required in the recovery process.
A portion of those payments is made in the form of a retainer to
Sharps & Associates PSC, a law firm solely owned by Douglas
R. Sharps, the Companys Executive Vice
President  Finance and Administration, Chief
Financial Officer and Secretary.

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|         |                                       
|-------- | --------------------------------------
|Item 14. | Principal Accountant Fees and Services

The following table sets forth the aggregate fees billed to the
Company for the fiscal years ended December 31, 2003 and
2002 by the Companys principal accounting firm,
PricewaterhouseCoopers LLP. All audit and non-audit services
provided by PricewaterhouseCoopers LLP are pre-approved by the
Audit Committee, which considers whether the provision of
non-audit services is compatible with maintaining the
accountants independence.

|                   |       |                     |         |         |  |   |         |         | 
|------------------ | ----- | ------------------- | ------- | ------- |  | - | ------- | ------- | 
|                   |       |                    
|                   |       | For the Years Ended
|                   |       | December 31,       
|                   |       |                    
|                   |       | 2003                |         | 2002   
|                   |       |                     |         |        
|Audit Fees         |       | $                   | 143,713 | (1)     |  | $ | 148,455 | (1)    
|                  
|                  
|                  
|                  
|Audit-Related Fees |       |                     | 34,201  | (2)     |  |   | 17,188  | (2)    
|                  
|                  
|                  
|                  
|Tax Fees           |       |                     | 32,926  | (3)     |  |   | 69,365  | (3)    
|                  
|                  
|                  
|                  
|All Other Fees     |       |                     |        |         |  |   |        |        
|                  
|                  
|                  
|                  
|                   | Total |                     | $       | 210,840 |  |   | $       | 235,008 | 






|    |                                                                                                                                                                                                                                                                                                                                                                                    
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Any services rendered for: (1) statutory and/or financial
    audits of financial statements and (2) services associated
    with SEC registration statements, periodic reports or documents
    filed with the SEC and other documents issued in connection with
    securities offerings (comfort letters, consents).                                                            
|(2) | Any services rendered for: (1) financial statement audits
    of employee benefit plans; (2) consultations by the
    Companys management as to the accounting or disclosure
    treatment of transactions or events and/or the potential impact
    of proposed rules, standards or interpretations by the SEC, FASB
    or other regulatory bodies; and (3) attestation reports.
|(3) | Any services rendered for: (1) U.S. federal, state and
    local tax compliance and/or reviews and
    (2) U.S. federal, state and local tax consultation.                                                                                                                                                                                                                         

Pre-Approval of Audit and Permissible Non-Audit Services

The Charter of the Audit Committee, adopted on February 1,
2002, charges the Audit Committee with review of all aspects of
the Companys relationship with its independent auditors,
including the provision of and payment for all services. The
Audit Committee requires the Company to submit for prior
approval by the Audit Committee all non-audit engagements (other
than those relating to tax matters) of the independent auditors
by the Company. The Audit Committee also requires the Company to
submit for prior approval by the Audit Committee any engagement
of the independent accountants with respect to tax matters other
than those in the ordinary course for which the fee will be less
than $25,000.

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PART IV






|         |                                                                    
|-------- | -------------------------------------------------------------------
|Item 15. | Exhibits, Financial Statement Schedules and Reports on
    Form 8-K

(a) 1. Financial Statements



| |    |                                                                                                                              
| | -- | -----------------------------------------------------------------------------------------------------------------------------
| |    | Report of Independent Auditors                                                                                               
|
| |    | Balance Sheets  years ended December 31, 2003
    and 2002                                                                  
|
| |    | Statements of Income  years ended December 31,
    2003, 2002 and 2001                                                      
|
| |    | Statements of Changes in Stockholders Equity and
    Comprehensive Income  years ended December 31,
    2003, 2002 and 2001
|
| |    | Statements of Cash Flow  years ended
    December 31, 2003, 2002 and 2001                                                   
|
| | 2. | Financial Statement Schedules (none required)                                                                                
|
| | 3. | Exhibits                                                                                                                     

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

| |    |    |  |   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | -- | -- |  | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 2  | .1 |  |  |  | Asset Purchase Agreement, dated as of
    December 4, 1998, by and among the Registrant, MedCap
    Medical Cost Management, Inc. and Marcia Deutsch (incorporated
    by reference to Exhibit 2.1 of Registrants Current
    Report on Form 8-K, filed December 11, 1998, File
    No. 000-22585).                                                                                                                                                              
| | 2  | .2 |  |  |  | Amendment to Asset Purchase Agreement, dated as
    of December 8, 1999, by and among the Registrant, MedCap
    Medical Cost Management and Marcia Deutsch (incorporated by
    reference to Exhibit 2.1 of Registrants Current
    Report on Form 8-K, filed December 20, 1999, File
    No. 0-22585).                                                                                                                                                         
| | 2  | .3 |  |  |  | Asset Purchase Agreement, dated as of
    January 3, 1999, by and among the Registrant, Subro-Audit,
    Inc., ODonnell Leasing Co., LLP, Kevin M. ODonnell
    and Leah Lampone (incorporated by reference to Exhibit 2.1
    of Registrants Current Report on Form 8-K, filed
    January 11, 1999, File No. 000-22585).                                                                                                                                     
| | 2  | .4 |  |  |  | Amendment to Asset Purchase Agreement by and
    among the Registrant, Subro-Audit, Inc., ODonnell Leasing
    Co., LLP, Kevin ODonnell and Leah Lampone, dated as of
    January 25, 1999 (incorporated by reference to
    Exhibit 2.2 of Registrants Current Report on
    Form 8-K, filed February 3, 1999, File No. 000-22585).                                                                                                                           
| | 2  | .5 |  |  |  | Merger Agreement, dated as of February 19,
    2004, by and among the Registrant, TSI Holding Co., Inc. and TSI
    Acquisition Co., Inc. (incorporated by reference to
    Exhibit A of Registrants Preliminary Proxy Statement
    for a Special Meeting, dated March 11, 2004).                                                                                                                                                                               
| | 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, 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. 000-22585).
| | 4  | .3 |  |  |  | First Amendment to Rights Agreement, dated
    February 19, 2004, between the Registrant and National City
    Bank, as Rights Agent.                                                                                                                                                                                                                                                                                                                             
| | 10 | .1 |  |  |  | Trover Solutions, Inc. Outside Directors Equity
    Compensation Plan (incorporated by reference to Appendix B
    of Registrants Proxy Statement for its Annual Meeting
    dated April 3, 2002).                                                                                                                                                                                                                                                               
| | 10 | .2 |  |  |  | Trover Solutions, Inc. Non-Qualified Stock Option
    Plan for Eligible Employees (incorporated by reference to
    Exhibit 4.2 of Registrants Registration Statement on
    Form S-1, File No. 333-23287).                                                                                                                                                                                                                                                      
| | 10 | .3 |  |  |  | Trover Solutions, Inc. Amended and Restated
    Directors Stock Option Plan (incorporated by reference to
    Exhibit 10.2 of Registrants Annual Report on
    Form 10-K for the fiscal year ended December 31, 1998).                                                                                                                                                                                                                                          
| | 10 | .4 |  |  |  | Trover Solutions, Inc. 1997 Stock Option Plan for
    Eligible Participants (incorporated by reference to Annex A of
    Registrants Proxy Statement for a Special Meeting, dated
    November 10, 1997).                                                                                                                                                                                                                                                        
| | 10 | .5 |  |  |  | Amendment to Trover Solutions, Inc. 1997 Stock
    Option Plan for Eligible Participants (incorporated by reference
    to Exhibit A of Registrants Proxy Statement for its
    Annual Meeting, dated April 2, 1999).                                                                                                                                                                                                                                            

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| |    |     |  |   |  |                                                                                                                                                                                                                                                                                                                          
| | -- | --- |  | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 10 | .6  |  |  |  | Trover Solutions, Inc. Employee Stock Purchase
    Plan (incorporated by reference to Exhibit 99.1 of
    Registrants Registration Statement on Form S-8, File
    No. 333-41559).                                                                                                                                      
| | 10 | .7  |  |  |  | 2001 Management Group Incentive Compensation
    Plan. (incorporated by reference to Exhibit 10.5 of
    Registrants Annual Report on Form 10-K for the fiscal
    year ended December 31, 2000).                                                                                                                       
| | 10 | .8  |  |  |  | Restricted Stock Award Agreement between the
    Registrant and Thomas Quinn, dated March 1, 2002
    (incorporated by reference to Exhibit 10.8 of
    Registrants Annual Report on Form 10-K for the fiscal
    year ended December 31, 2002).                                                                        
| | 10 | .9  |  |  |  | Trover Solutions, Inc. Retirement Savings Plan
    (incorporated by reference to Exhibit 10.9 of
    Registrants Annual Report on Form 10-K for the fiscal
    year ended December 31, 2002).                                                                                                                           
| | 10 | .10 |  |  |  | Separation Agreement between Medaphis and the
    Registrant (incorporated by reference to Exhibit 10.1 of
    Registrants Amendment No. 2 to Registration Statement
    on Form S-1, File No. 333-23287).                                                                                                              
| | 10 | .11 |  |  |  | Supplemental Retirement Savings Plan
    (incorporated by reference to Exhibit 10.5 of
    Registrants Amendment No. 2 to Registration Statement
    on Form S-1, File No. 333-23287).                                                                                                                                  
| | 10 | .12 |  |  |  | Amendment to Supplemental Retirement Savings Plan
    (incorporated by reference to Exhibit 10.12 of
    Registrants Annual Report on Form 10-K for the fiscal
    year ended December 31, 2002).                                                                                                                       
| | 10 | .13 |  |  |  | Lease between W&M Kentucky, Inc. and the
    Registrant (incorporated by reference to Exhibit 10.6 of
    Registrants Registration Statement on Form S-1, File
    No. 333-23287).                                                                                                                                      
| | 10 | .14 |  |  |  | Lease Addendum VI between W&M of Kentucky,
    Inc. and the Registrant, dated December 22, 1999
    (incorporated by reference to Exhibit 10.12 of
    Registrants Annual Report on Form 10-K for the fiscal
    year ended December 31, 1999).                                                                         
| | 10 | .15 |  |  |  | Amended and Restated Credit Agreement, dated as
    of November 1, 2001, by and among the Registrant and the
    Lending Institutions named therein (incorporated by reference to
    Exhibit 10.12 of Registrants Annual Report on
    Form 10-K for the fiscal year ended December 31, 2001).                         
| | 10 | .16 |  |  |  | Amendment No. 1 to Amended and Restated
    Credit Agreement, dated as of September 23, 2002, by and
    among the Registrant and the Lending Institutions named therein
    (incorporated by reference to Exhibit 10.16 of
    Registrants Annual Report on Form 10-K for the fiscal
    year ended December 31, 2002).
| | 10 | .17 |  |  |  | Employment Agreement between the Registrant and
    Patrick B. McGinnis, dated January 1, 2003 (incorporated by
    reference to Exhibit 10.17 of Registrants Annual
    Report on Form 10-K for the fiscal year ended
    December 31, 2002).                                                                          
| | 10 | .18 |  |  |  | Severance Agreement between the Registrant and
    Mark J. Bates, Dated March 12, 2003 (incorporated by
    reference to Exhibit 10.18 of Registrants Annual
    Report on Form 10-K for the fiscal year ended
    December 31, 2002).                                                                                  
| | 10 | .19 |  |  |  | Form of Severance Agreement between the
    Registrant and Douglas R. Sharps, Debra M. Murphy, Robert L.
    Jefferson and Robert G. Bader dated January 1, 2002
    (incorporated by reference to Exhibit 10.1 of
    Registrants Quarterly Report on Form 10-Q for the
    quarter ended March 31, 2002).             
| | 10 | .20 |  |  |  | Promissory Note Payable to the Registrant from
    Patrick B. McGinnis (incorporated by reference to
    Exhibit 10.21 of Registrants Annual Report on
    Form 10-K for the fiscal ended December 31, 1999).                                                                                                           
| | 10 | .21 |  |  |  | Amended and Restated Promissory Note Payable to
    the Registrant from Patrick B. McGinnis, dated June 30,
    2000 (incorporated by reference to Exhibit 10.3 of
    Registrants Quarterly Report on Form 10-Q for the
    quarter ended June 30, 2000).                                                              
| | 10 | .22 |  |  |  | Deferred Compensation Agreement, dated
    June 30, 2000, by and between the Registrant and Patrick B.
    McGinnis (incorporated by reference to Exhibit 10.4 of
    Registrants Quarterly Report on Form 10-Q for the
    quarter ended June 30, 2000).                                                               
| | 10 | .23 |  |  |  | Purchase Agreement, dated as of June 29,
    2001, between the Registrant and GCG Acquisitions, LLP
    (incorporated by reference to Exhibit 10.18 of
    Registrants Annual Report on Form 10-K for the fiscal
    year ended December 31, 2001).                                                                     

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| |    |     |  |   |  |                                                                                                                                                                                                                                                                            
| | -- | --- |  | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 10 | .24 |  |  |  | Amendment to Purchase Agreement, dated as of
    July 29, 2001, between the Registrant and GCG Acquisitions,
    LLP (incorporated by reference to Exhibit 10.19 of
    Registrants Annual Report on Form 10-K for the fiscal
    year ended December 31, 2001).          
| | 10 | .25 |  |  |  | Second Amendment to Purchase Agreement, dated as
    of November 8, 2001, between the Registrant and GCG
    Acquisitions, LLP (incorporated by reference to
    Exhibit 10.20 of Registrants Annual Report on
    Form 10-K for the fiscal year ended December 31, 2001).
| | 10 | .26 |  |  |  | Trover Solutions, Inc. Executive Compensation
    Plan dated January 1, 2003 (incorporated by reference to
    Exhibit 10.2 of Registrants Quarterly Report on
    Form 10-Q for the quarter ended March 31, 2003).                                                       
| | 10 | .27 |  |  |  | Amendment No. 2 to Amended and Restated
    Credit Agreement, dated as of February 21, 2003
    (incorporated by reference to Exhibit 10.4 of
    Registrants Quarterly Report on Form 10-Q for the
    quarter ended March 31, 2003).                                    
| | 23 | .1  |  |  |  | Consent of PricewaterhouseCoopers LLP.                                                                                                                                                                                                                                     
| | 31 | .1  |  |  |  | Certification of Chief Executive Officer pursuant
    to Rule 13a-14(a) or Rule 15d-14(a) of the Securities
    Exchange Act as adopted under Section 302 of the
    Sarbanes-Oxley Act of 2002.                                                                           
| | 31 | .2  |  |  |  | Certification of Chief Financial Officer pursuant
    to Rule 13a-14(a) or Rule 15d-14(a) of the Securities
    Exchange Act as adopted under Section 302 of the
    Sarbanes-Oxley Act of 2002.                                                                           
| | 32 |     |  |  |  | Certifications pursuant to 18 U.S.C.
    Section 1350, as adopted pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002.                                                                                                                                           
| | 99 | .1  |  |  |  | Trover Solutions, Inc. Private Securities
    Litigation Reform Act of 1995 Safe Harbor Compliance Statement
    for Forward-Looking Statements.                                                                                                                           

(b) Reports on Form 8-K

|                                                                          |  |                |                  | 
|------------------------------------------------------------------------- |  | -------------- | ---------------- | 
|Item Reported                                                             |  | Date Furnished
|                                                                          |  |               
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|Items 7 and 12  Text of Earnings
    Release and Slide Show Presentation |  |                | November 6, 2003 | 

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##### Table of Contents



SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.



| |     |                        
| | --- | -----------------------
| | By: | /s/ PATRICK B. MCGINNIS

| |                                                    
| | ---------------------------------------------------
| |                                                    
| | Patrick B. McGinnis                                
| | Chairman, President and Chief Executive
    Officer
|
| | Dated: March 19, 2004                              

Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the
dates indicated:

|                                                   |  |                                                                                                       |  |      |                | 
|-------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------- |  | ---- | -------------- | 
|Signature                                          |  | Title                                                                                                 |  | Date
|                                                   |  |                                                                                                       |  |     
|/s/ PATRICK B. MCGINNISPatrick B. McGinnis         |  | Chairman, President and Chief Executive Officer
    (Principal Executive Officer)                     |  |      | March 19, 2004 | 
|                                                  
|/s/ DOUGLAS R. SHARPSDouglas R. Sharps             |  | Executive Vice President and Chief Financial
    Officer (Principal Financial and Accounting Officer) |  |      | March 19, 2004 | 
|/s/ WILLIAM C. BALLARD, JR.William C. Ballard, Jr. |  | Director                                                                                              |  |      | March 19, 2004 | 
|/s/ JILL L. FORCEJill L. Force                     |  | Director                                                                                              |  |      | March 19, 2004 | 
|/s/ JOHN H. NEWMANJohn H. Newman                   |  | Director                                                                                              |  |      | March 19, 2004 | 
|/s/ LAUREN N. PATCHLauren N. Patch                 |  | Director                                                                                              |  |      | March 19, 2004 | 
|/s/ CHRIS B. VAN ARSDELChris B. Van Arsdel         |  | Director                                                                                              |  |      | March 19, 2004 | 

87