TROVER SOLUTIONS INC - 10-K Annual Report

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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, 2002
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)

DELAWARE 61-1141758
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)

1600 WATTERSON TOWER
LOUISVILLE, KENTUCKY 40218
(Address of principal executive offices) (Zip Code)
(502) 454-1340
(Registrant's telephone number, including area code)

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

NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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None

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

TITLE OF CLASS
Common Stock, par value $.001 per share
(including rights attached thereto)

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of 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. [ ]

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

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 $54,059,712 (based on
the last sale price of a share of Common Stock as of June 28, 2002 ($5.90)), as
reported by The Nasdaq National Market.

As of March 18, 2003, 8,451,229 shares of the Registrant's Common Stock,
$0.001 par value, were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on May 9, 2003 are incorporated herein by reference in
Part III.
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TABLE OF CONTENTS

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 it is a leading independent provider of
outsourcing of subrogation and certain other medical claims recovery and cost
containment services to the private healthcare payor industry in the United
States, based on the Company's experience and assessment of its market. The
Company's primary business is medical claims recovery, and its primary product
is subrogation recovery, which generally entails the identification,
investigation and recovery of accident-related medical benefits incurred by its
clients on behalf of their insureds, but for which other persons or entities
have primary responsibility. The Company's clients' rights to recover the value
of these medical benefits, arising by law or contract, are 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 41.6 million and 49.1 million lives under contract from its
clientele at December 31, 2002 and 2001, respectively.

The Company has three segments: (1) Healthcare Recovery Services, which
encompasses its four healthcare recovery products: healthcare subrogation,
provider bill audit, overpayment recovery, and physician bill audit ("MD
Audit"); (2) Property and Casualty Recovery Services, which includes subrogation
recovery services for property and casualty insurers, which the Company sells
under the brand name "TransPaC Solutions"; and (3) Software, which includes the
sale of subrogation recovery software in a browser-based application service
provider (ASP) form. 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 17 -- Segment
Information" for financial information about the Company's segments.

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 intends to pursue a two-fold growth strategy. First, with
respect to its existing healthcare recovery services business, the Company will
focus on (i) servicing its existing client base, (ii) selling and installing the
additional lives 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. The Company
will continue to explore, from time to time, strategic acquisitions which meet
its selection criteria and to develop new service products internally.

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Under the second aspect of its growth strategy, the Company intends to
extend its systems-driven, process-oriented approach, through acquisitions and
internal development, to outsourcing opportunities 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. See "-- Business Developments".

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 Software, which offers
to healthcare payors and P&C insurers an on-line subrogation recovery system in
an application service provider ("ASP") model.

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, 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 believes that it is a leading independent provider of
outsourcing of subrogation and certain other related medical claims recovery and
cost containment services to the private healthcare payor industry in the United
States. The Company's success is

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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,
typically all paid claims for a fixed period are analyzed 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 other insurance
carriers. For example, an HMO may pay the hospitalization and related health
expenses of a member who is injured in an automobile accident. However, the
party responsible for the accident is generally liable to the injured person for
the damages arising from the injury, which include lost wages, property loss,
pain and suffering and medical benefits. The responsible party usually has a
liability insurance policy that will pay covered damages, including medical
benefits, upon the acceptance of the injured party's claim. The healthcare payor
actually providing or paying for the medical benefits conferred on the injured
party (in this example, an HMO) may have a variety of rights through which it is
entitled to recover the value of such medical benefits from the responsible
party and the responsible party's liability insurer.

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.

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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 52 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 9.1
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 annotate the files on-line, as necessary,
to document progress, developments and status and otherwise maintain the history
of each claim. Approximately 25% of these healthcare subrogation recovery
personnel perform their work on Troveris, the internally-developed recovery
software that replaces the legacy subrogation system. The transition of the
remainder of the healthcare subrogation recovery personnel is currently expected
to be complete by the third quarter of 2003. See "-- Software".

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 42% 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

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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 28
attorneys, 14 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 is 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 65% of the Company's recoveries on behalf of
clients involved automobile liability insurance, 15% involved premises liability
insurance, 10% involved workers' compensation insurance and 10% 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. Providers may bill
healthcare payors under a variety of pricing regimes, including standard
fee-for-service charges, discounted fee-for-service charges, case rates, per
diem rates, and charges based on stop-loss insurance thresholds. In addition,
Medicare risk claims that are paid under a variety of arrangements, including
federally mandated payment methodologies, are also generally subject to audit by
the payor.

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

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make up the claim at the site of the provider. Based on historical experience,
approximately 91% 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.

Negotiation and Settlement of Claims. Once an overpayment is verified it
is forwarded to a unit specializing in collections for recovery. Historically,
approximately 80% 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 ("MD Audit") involves a review of physician claims in order
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.

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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.

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.

7

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
installation, with substantially all recoveries made within 36 months. 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 is 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. The Company currently estimates that 40% to 50% of the
private health insurance and health benefits markets do not outsource
subrogation recoveries. Public sector markets, such as Medicaid and Medicare,
have virtually no outsourcing of subrogation recoveries. These programs
typically rely on their claims administration contractors to provide subrogation
services as part of a bundled service contract. The Company believes that, like
the health insurance market, certain participants in the P&C insurance market
are less likely to outsource subrogation services. The Company believes mutual
insurers have organizational and cultural biases against outsourcing and larger
P&C insurers have sufficient resources to develop relatively sophisticated
internal departments. In June 2002, the Company made its first sale of the
Troveris software to an outside client (United Medical Resources). Additionally,
the Company has received indications of interest from other potential
purchasers.

The Troveris marketing strategy combines the opportunity for an internal
subrogation department to gain operating efficiency through the functionality of
state-of-the-art desktop software and to leverage its ability to produce
recoveries through the purchase of unbundled components of the Company's
traditional subrogation outsourcing services. The Troveris software application
allows the Company to administer these customized relationships using the same
proprietary processes as it uses for those customers who purchase turnkey
subrogation outsourcing services. An additional benefit of the Troveris software
application is that the Company believes that it will substantially reduce
future expenses for maintaining software applications that it has historically
used to provide turnkey 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 except healthcare subrogation. 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 impounded in the Company's guidance for 2003 financial
results. The Company currently expects to complete the migration to Troveris in
the third quarter of 2003, and shortly thereafter to abandon its legacy
subrogation system. Given the complexities of software development and change
management, the Company may

8

lengthen this schedule in order to assure that there is no disruption in
operations. If the Company does lengthen the transition schedule, the Company
believes that such a change will have no adverse financial consequence for the
Company or its clients. The Troveris application also enables the Company to
expand its ability to manage its knowledge workers via telecommuting
arrangements. While the Company believes it can achieve the foregoing transition
and corresponding reduction of expenses in the outlined timeframe, future facts
and circumstances could change these estimates. See "Safe Harbor Compliance
Statement for Forward-Looking Statements" included as Exhibit 99.1.

EMPLOYEES

The Company employs, and facilitates the development of, skilled
knowledge-workers. The Company maintains an extensive in-house training program,
which it believes is attractive to employees and essential in developing the
necessary industry-specific skills. Because the Company employs specialized
labor in its recovery activities, it believes that a tight labor market for any
of those specialties could affect future hiring. The Company employed 666
persons as of December 31, 2002 and 698 persons as of December 31, 2001.

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.

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
9

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, 2002, clients terminated healthcare
recovery services covering 8.5 million lives; certain of these same clients,
however, kept in place or bought from the Company other healthcare recovery
services with respect to 2.2 million lives. During the three-year period ended
December 31, 2002, clients terminated healthcare recovery services covering 16.9
million lives; these same clients, however, kept in place or bought from the
Company other healthcare recovery services covering 2.6 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, 2002, the Company lost one property and
casualty client. The termination occurred due to the process being taken
in-house. See Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Property and Casualty Recovery
Services -- Results of Operations -- Key Operating Indicators".

CLIENT BASE

Healthcare Recovery Services. The Company provides services to healthcare
plans that as of December 31, 2002 covered approximately 41.6 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 The Principal Financial Group
Humana Inc. Kaiser Permanente
General American Life Insurance Wellpoint Health Network Inc.
Group Health, Inc. FIRST HEALTH

The Company has two clients that individually comprise more than 10% of the
Company's revenue. The Company's largest source of revenue is UnitedHealth Group
("UHG"). For the years ended December 31, 2002, 2001 and 2000, UHG generated
28%, 27% and 24% of the Company's revenues, respectively. Wellpoint Health
Network Inc. accounted for 14%, 11% and 7% of the Company's revenues in the
years ended December 31, 2002, 2001 and 2000, 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 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, 2002 and 2001, the Company had Healthcare Recovery
Services backlog of $1,559.0 million and $1,414.8 million, respectively.

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 will be performed by
its Ingenix strategic business unit. The Company expects to continue recovering
on the backlog as to which UHG terminated the Company's services,

10

a process that the Company expects will be completed in 5 to 6 years. The
Company's contract with UHG expired in accordance with its terms on February 1,
2003 except with respect to 1.8 million lives as to which the Company continues
to provide healthcare subrogation recovery services.

Property and Casualty Recovery Services. As of December 31, 2002, the
Company provides services to 15 P&C insurers, of which three 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 70% of this segment's backlog at
December 31, 2002.

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, 2002, the Company had P&C Recovery Services backlog of $15.3
million.

Software. As of December 31, 2002, the Company had one software client, a
Cincinnati-based third party administrator of healthcare claims for self-funded
employers. 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, there are four
smaller, but significant, independent providers of healthcare subrogation
recovery services in addition to the Company. There are three different vendors
that provide competitive overpayment recovery outsourcing services, as well as
three national companies that provide competing 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 four
competitors that attempt to serve a national market. Three of these competitors
are owned and controlled by P&C insurers, and the Company believes that this
fact may deter potential buyers of these competitors' services if those
potential buyers also compete against the competitors' parent organizations.

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.

11

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.

LEGAL AND REGULATORY ENVIRONMENT

The healthcare industry is subject to numerous regulations, which may
adversely affect the Company's business. In addition to laws and regulations
affecting healthcare and insurance, changes in federal fair debt collection
regulations may also adversely affect the Company's business.

General. From time to time, legislation is introduced in Congress and in
various state legislatures which would materially 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"); (ii) legislation that would substantially limit the
Company's ability to receive and utilize individual claim information from
healthcare insurers ("Confidentiality Laws"); and (iii) other federal and state
laws and certain legal doctrines. The following identifies specific risks in
these three categories:

Health Insurance Primacy Laws

Auto Choice Reform Act. During May 2001, Congress proposed 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 be able to choose to be covered by an auto insurance system in
which healthcare insurers, with some exceptions, may be 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 have no 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.

12

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. On December 28, 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"). The Secretary modified certain provisions of the Privacy Rule
in August 2002. The Privacy Rule, which deals with the use and disclosure of
health information, 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.
Health plans, health care clearinghouses, and certain health care providers
covered by the Privacy Rule ("Covered Entities") generally have 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 that require patient consent or authorization, (b)
individuals' rights to access, amendment, and accounting regarding their
protected health information, and (c) individuals' rights to receive notice of
Covered Entities' practices with respect to protected health information.

The Privacy Rule affects other entities, that are not necessarily Covered
Entities under the Privacy Rule, who 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 will 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 "Transactions Standard"). The Transactions
Standard adopts 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 Transactions Standard establishes certain
code sets to be used in connection with the standard transactions.

13

Although the Transactions Standard had a compliance deadline of October 16,
2002, the Secretary granted a one-year extension upon submission of a plan to
come into compliance.

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 fully 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.

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 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 begun to
apply a doctrine under ERISA that prevents health plans (and their recovery
agents) from bringing healthcare reimbursement actions in federal court.

14

BUSINESS DEVELOPMENTS

Acquisition Activities

The Company, from time to time, considers acquisition opportunities to
provide additional growth in revenues and net income. The Company's acquisition
strategy is two-fold. First, it may acquire additional claims recovery services
that it can sell into its installed base of health insurers, managed care
companies, benefits administrators, and P&C insurers. This will allow the
Company to leverage its sales and marketing resources and to acquire the
necessary core knowledge workers to provide service.

Second, the Company may acquire businesses that offer knowledge-based
services into market segments not currently served by the Company. The Company
believes that these types of acquisitions will enable it to sell its existing
services to current customers of the acquired business and create an opportunity
to serve new customers in that market segment.

The Company evaluates all acquisition opportunities in light of its ongoing
stock repurchase plan, which it regards as a competing use of capital.

ITEM 2. PROPERTIES

As of December 31, 2002, 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. In July 2002, the Company terminated a lease agreement for 4,670 square
feet for a regional operating office in Atlanta, Georgia, which was to have
expired in 2005.

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 its
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 been filed against the
Company or its clients concern the entitlement to recover a specific, individual
subrogation claim or the amount of the subrogation claim. Typically, these
actions do not ask for punitive damages, are not pled as class actions, and do
not have wide implications with respect to the Company's ongoing business
practices.

To date, however, the Company has encountered eight noteworthy instances in
addition to the 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".

15

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 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.

Three of the eight 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
contexts for this kind of litigation and the Company's relative successes in
handling past business practices litigation, but are not necessarily predictive
of the outcomes of any of the Pending and Potential Cases.

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

CURRENT LITIGATION

Conte v. Healthcare Recoveries

Conte v. Healthcare Recoveries, Inc., was settled for a nominal amount in
late 2002 after the court denied class certification and dismissed all but one
of the plaintiff's claims. A summary procedural history of the case is described
below.

In October 1999, a First Amended Class Action Complaint ("Amended
Complaint") was filed against the Company in the United States District Court
for the Southern District of Florida, in a putative class action brought by
William Conte and Aaron Gideon, individually and on behalf of all others
similarly situated. In that complaint, Conte v. Healthcare Recoveries, Inc., No.
99-10062, the plaintiffs asserted that the Company's subrogation recovery
efforts on behalf of its clients violated a number of state and federal laws,
including the Fair Debt Collection Practices Act and the Florida Consumer
Collection Practices Act. The Amended

16

Complaint also sought a declaratory judgment that the Company, as the
subrogation agent for various healthcare payors, was not entitled to assert and
recover upon subrogation or reimbursement liens it asserted on settlements
obtained from third party tortfeasors when the settlement was in an amount less
than the amount required to fully compensate (or "make whole") the injured party
for all elements of damage caused by the tortfeasor. The plaintiffs purported to
represent a class consisting of all participants or beneficiaries of ERISA plans
nationwide whose net recovery of damages through judgments, settlements or
otherwise against liable third parties has been reduced or potentially reduced
by the Company's alleged assertion and/or recovery of unlawful
subrogation/reimbursement rights of its clients. Each count of the Amended
Complaint sought compensatory and/or statutory damages as well as exemplary and
punitive damages. The plaintiffs also sought injunctive relief, prejudgment
interest, costs and attorneys' fees.

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

The plaintiffs' motion to certify a nationwide class, which the Company
opposed, was submitted to the court in September 2000. On June 5, 2002, the
court entered an order denying the plaintiffs' motion for class certification
and the plaintiffs did not appeal that order.

In October 2002, the Company and the two named plaintiffs reached an
agreement in principle to settle all claims in the lawsuit under terms that
would not require any payment by the Company and would not impact the Company's
operations in any respect. The parties subsequently entered into a formal
written settlement embodying the agreement in principle, pursuant to which the
named plaintiffs released all claims against the Company. On February 6, 2003,
the Court entered an order dismissing the action with prejudice.

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 plaintiffs assert are
unenforceable because (1) prepaid medical service plans may not exercise rights
of subrogation and reimbursement; (2) the subrogation and reimbursement claims
asserted by the Company are not supported by contract documents that provide
enforceable recovery rights and/or do not adequately describe the recovery
rights; and (3) the sums recovered pursuant to such claims unlawfully exceed the
amount Prudential paid for medical goods and services. The Company was served
with the Petition in November 1999, and has answered, denying all allegations.
The court has not yet addressed the question of whether to certify the putative
class. After the defendants filed a motion for summary judgment in January 2002,
the plaintiff moved the court to delay consideration of the motion until 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 does 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' motion for summary judgment to the extent that Prudential could not
recover more than its costs.

17

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

Franks et al. v. Prudential Health Care Plan and Healthcare Recoveries,
Inc., was settled for a nominal amount in February 2003. A summary procedural
history of the case is described below.

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

In response to the defendants' motion, in February 2001, the court rendered
its opinion and entered an order dismissing all of the plaintiff's claims with
the exception of the plaintiff's claim for attorney fees. In March 2001, the
Company filed an answer to the Complaint denying all of the plaintiff's
allegations. Also in March 2001, the plaintiff filed a motion to alter or amend
the court's ruling on the motion to dismiss. On July 15, 2002, the court denied
the plaintiff's motion to alter or amend the court's ruling on the motion to
dismiss. On February 18, 2003, the defendants served an offer of judgment in the
amount of $21,000 pursuant to Rule 68 of the Federal Rules of Civil Procedure.
That offer was accepted by the plaintiff Timothy Franks in February 2003 and in
March 2003 the court approved dismissal of the case with prejudice.

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 reimburse-
18

ment 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,
prejudgment interest and attorneys' fees. The Company was served with the
original Complaint in late December 1999 and answered denying all allegations.
The Company filed a motion to dismiss in August 2000 and in June 2001 the court
granted the Company's motion to dismiss. The plaintiffs filed a notice of appeal
in July 2001. All parties have filed briefs, but the appellate court has not yet
ruled on the plaintiffs' appeal of the dismissal, nor has oral argument been
scheduled.

Hamilton v. Healthcare Recoveries

On March 12, 2001, a Complaint ("Complaint") was filed against the Company
in the United States District Court for the Eastern District of Louisiana, in a
putative class action brought by Kyle M. Hamilton. In that action, Hamilton v.
Healthcare Recoveries, Inc., No. 01-650, 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. On November 1, 2002, the Court of Appeals rendered its
opinion reversing the dismissal of the FDCPA claims. The court also affirmed the
trial court's determination that diversity jurisdiction did not exist in the
case. The court remanded the case to the federal district court for further
proceedings. The time in which the Company may seek further appeal has not
expired, and the Company is now reviewing the opinion. The Company disputes the
plaintiff's allegations regarding the applicability of the FDCPA and intends to
vigorously defend its position in this case.

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

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

On December 14, 2001, Valerie Rogalla, the plaintiff in a putative class
action against a health care provider, amended her complaint to add Healthcare
Recoveries, Inc. as a defendant in Valerie Rogalla v. Christie Clinic, P.C.,
PersonalCare Health Management, Inc. and Healthcare Recoveries, Inc., No.
01-L-203, Circuit Court of the Sixth Judicial Circuit, Champaign County,
Illinois. In her complaint, the plaintiff makes allegations on behalf of herself
and all others similarly situated. The complaint asserts that the Company, as
subrogation agent for PersonalCare Health Management, made fraudulent
misrepresentations in the course of

19

unlawfully pursuing subrogation and reimbursement claims. The complaint seeks
recovery from the Company for compensatory damages, punitive damages and costs.
The Company disputes the plaintiff's allegations and intends to vigorously
defend its position in this case. Each defendant filed a motion to dismiss the
action. On October 2, 2002, the Court granted each of the defendants' motions
and dismissed the Plaintiff's action entirely. On October 22, 2002, the
plaintiff filed her notice of appeal. A hearing has not yet been scheduled on
the plaintiff's appeal.

Chan v. Trover Solutions

On November 19, 2002, a Complaint ("Complaint") was filed against the
company in the Superior Court of the State of California for the County of Los
Angeles in a putative class action brought by Roger Chan. In that action, Roger
Chan v. Healthcare Recoveries, Inc. and Trover Solutions, Inc. and Does 1
through 100, inclusive, No. CV 03-0465 FMC, the plaintiff asserts that the
Company's subrogation recovery efforts violate California's unfair trade
practices statute by pursuing recovery from ERISA members' personal injury
recoveries when case law allegedly held that ERISA plans could not enforce their
recovery rights. The Company timely removed the action to federal court and
filed a motion to dismiss. The plaintiff filed a motion to remand the case back
to the state court. On March 3, 2003 the Court entered an order denying the
plaintiff's motion to remand and denying the defendant's motion to dismiss. The
Company disputes the plaintiff's allegations and intends to vigorously defend
its position in this case.

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

On October 30, 2002, the Cajas and Franks plaintiff's counsel 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, one of the
Company's clients, Prudential Insurance Company, a subsidiary of the client,
PruCare HMO, and a company who had acquired the business of the client company,
Aetna. 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
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 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.

The Company has retained counsel and will vigorously defend itself against
these allegations.

20

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 violation of the Arkansas Health
Maintenance Organizations Act. The Amended Complaint further alleges that in
recovering the subrogation claim the Company acted negligently, that it
interfered with the plaintiff's contractual relationship with the motor vehicle
insurer and that the Company may be directly or vicariously liable for the acts
of other defendants. The Amended Complaint demands relief on behalf of a
purported class of persons who purchased medical payments coverage as required
by the Arkansas no-fault motor vehicle insurance statute and who were entitled
to but did not receive benefits under such policies due to the payment of those
benefits to third parties, including the Company and HMO Partners. The Amended
Complaint demands compensatory and punitive damages, 12% statutory penalties,
costs, expenses, interest and attorney's fees.

The Company was served with the Amended Complaint on March 18, 2003 and has
not yet filed a response. The Company intends to retain counsel and to
vigorously defend itself against these allegations.

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

In terms of the Company's business practices and the allegations underlying
the Cajas, Martin and Bruun cases, 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

21

parties. As a result of the foregoing, there can be no assurance that the
Company will not be subject to further class action litigation, that existing
and/or future class action litigation against the Company and its clients will
not consume significant management time and/or attention or that the cost of
defending and resolving such litigation will not be material.

ITEM 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.

On March 18, 2003, there were approximately 42 holders of record of the
Company's Common Stock.

The Company has paid no cash dividends since the sale of the Company by
Medaphis Corporation 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 7. "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources".

22

ITEM 6. SELECTED FINANCIAL DATA

STATEMENTS OF INCOME DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

STATEMENTS OF INCOME AS A PERCENTAGE OF CLAIMS REVENUES

23

BALANCE SHEET DATA
(DOLLARS IN THOUSANDS)

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

(1) The increase in working capital, including cash and cash equivalents, is
primarily attributable to the $19.2 million of proceeds received by the
Company from the exercise of the underwriters' over-allotment option granted
by the Company in connection with the May 1997 initial public offering.

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

OVERVIEW OF COMPANY

The Company believes it is a leading independent provider of outsourcing of
subrogation and certain other medical claims recovery and cost containment
services to the private healthcare payor industry in the United States, based on
the Company's experience and assessment of its market. The Company's primary
business is medical claims recovery and its primary product is subrogation
recovery, which generally entails the identification, investigation and recovery
of accident-related medical benefits incurred by its clients on behalf of their
insureds, but for which other persons or entities have primary responsibility.
The Company's clients' rights to recover the value of these medical benefits,
arising by law or contract, are known generally as the right of subrogation and
are generally paid from the proceeds of liability or workers' compensation
insurance. The Company's other medical claims recovery services include (1) the
auditing of the bills of medical providers, particularly hospitals, for
accuracy, correctness and compliance with contract terms ("provider bill
audit"), (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 41.6 million and 49.1
million lives under contract from its clientele at December 31, 2002 and 2001,
respectively.

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

ACQUISITIONS

On January 25, 1999, the Company acquired the assets and certain
liabilities of Subro-Audit, Inc., a Wisconsin corporation ("SAI"), and a related
entity, O'Donnell Leasing Co., LLP, a Wisconsin limited liability partnership
("ODL" and, together with SAI, "Subro Audit"), for approximately $24.4 million
(the "Subro Audit Acquisition"), using available unrestricted cash. The Company
paid an additional $5.3 million pursuant to an earn-out arrangement. The final
amount of $2.5 million was paid on June 7, 2001, and $2.8 million was paid on
May 18, 2000. Approximately $4.7 million was held in escrow for the potential
earn-

24

out and was included in restricted cash at December 31, 2000. SAI is based in
Wisconsin and provides subrogation recovery services with respect to an
installed base of lives, which are covered by insurers, HMOs and employer-funded
plans, throughout the United States of America. The Subro Audit Acquisition was
accounted for using the purchase method of accounting.

On February 15, 1999, the Company acquired the assets and certain
liabilities of MedCap Medical Cost Management, Inc., a California corporation
("MedCap"), for approximately $10 million, using available unrestricted cash and
borrowed funds (the "MedCap Acquisition" and, together with the Subro Audit
Acquisition, the "Acquisitions"). The Company paid approximately $4.8 million
from February 15, 2000 through January 15, 2001 pursuant to an amendment to the
original earn-out agreement. MedCap provides a variety of medical cost
management services to health insurers and HMOs, primarily in California. These
services include provider bill auditing, contract compliance review,
identification of certain other payments, and cost management consulting
services. The MedCap Acquisition was accounted for using the purchase method of
accounting.

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 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB
101). SAB 101 provides guidance on revenue recognition and related disclosures
and was effective beginning October 1, 2000. The Company was previously
following the requirements provided under SAB 101 and, accordingly, the
implementation of this pronouncement had no impact on the Company's financial
position or results of operations for 2002, 2001 or 2000.

Accounts Receivable and Collectibility

Approximately $4.4 million and $4.7 million of the Company's accounts
receivable balance of $9.4 million at December 31, 2002 and 2001, 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, 2002 and 2001 was attributable to subrogation claims represented
approximately 4,000 settled cases for approximately 140 clients and
approximately 3,800 settled cases for approximately 150 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
25

by third parties to those settled cases (because of broken settlement
agreements, for example), additional allowances may be required.

Approximately $4.4 million and $4.6 million of the Company's accounts
receivable balance of $9.4 million at December 31, 2002 and 2001, 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 from the provider
representative as evidence of agreement with the audit findings. The Company
maintains an allowance for doubtful accounts for the estimated losses arising
from adjustments the client may make to invoiced amounts based on the client's
inability to recoup the claim overpayment from the provider. The amount of the
allowance is based on the Company's historical experience related to client
adjustments. However, the Company's fee for provider bill audit services is
self-funding in that the client is able to adjust future claim payments made to
the providers for the audit discrepancies identified. The accounts receivable
balance that at December 31, 2002 and 2001 was attributable to provider bill
audits completed represented approximately 2,900 completed audits for twelve
clients and 3,000 completed audits for nine clients, respectively. If the
Company's provider bill audit clients were to increase the value of negative
adjustments made to audit results, additional allowances may be required.

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, 2002, goodwill and other long-lived assets represented 54%
of the Company's total assets and 91% of the Company's total stockholders'
equity.

Goodwill is no longer amortized but 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 17 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 will perform its annual impairment review during the second quarter of
each year, commencing in the second quarter of 2003 and at such other times if
adverse events or changes in circumstances indicate that the goodwill may be
impaired.

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

26

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.

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 (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
$524,000 at December 31, 2002 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
27

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
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 Statement of Financial Accounting Standards No. 123 (SFAS
No. 123) 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. If the Company were
to adopt SFAS No. 123 to account for options, compensation expense would be
recognized resulting in a decrease in net income and earnings per share for the
years ended December 31, 2002, 2001 and 2000, as set forth in Notes 2 and 13 in
Item 8. "Financial Statements and Supplementary Data".

IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

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

Also, in June 2001, the FASB issued Statement of Financial Accounting
Standards No. 142 (FAS 142), "Goodwill and Other Intangible Assets", which
establishes the accounting for goodwill and other intangible assets following
their recognition. FAS 142 applies to all goodwill and other intangible assets
whether acquired singly, as part of a group, or in a business combination. FAS
142 provides that goodwill should not be amortized but should be tested for
impairment annually, and at other times as events or circumstances indicate an
impairment may have occurred, using a fair-value based approach. In addition,
FAS 142 provides that other intangible assets other than goodwill should be
amortized over their useful lives and reviewed for impairment. FAS 142 was
effective for the Company beginning on January 1, 2002. The Company was required
to perform a transitional impairment test under FAS 142 for all goodwill
recorded as of January 1, 2002. During the three months ended June 30, 2002, the
Company completed a transitional impairment test under FAS 142 for all goodwill
recorded as of January 1, 2002. See Note 8 "Goodwill and Other Intangible
Assets" in Item 8. "Financial Statements and Supplementary Data".

In July 2001, the FASB issued Statement of Financial Accounting Standards
No. 143 (FAS 143), "Accounting for Asset Retirement Obligations". FAS 143 is
effective for fiscal years beginning after June 15, 2002, and provides
accounting requirements for asset retirement obligations associated with
tangible long-lived assets. The Company believes that the adoption of this
standard will not have a significant effect on its financial statements.

In October 2001, the FASB issued Statement of Financial Accounting
Standards No. 144 (FAS 144), "Accounting for the Impairment or Disposal of
Long-Lived Assets". FAS 144 is effective for fiscal years beginning after
December 15, 2001. This statement supersedes FAS 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of",
and the accounting and reporting provisions of APB Opinion No. 30, "Reporting
the Results of Operations -- Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions", for the disposal of a business segment. FAS 144 establishes a
single accounting model, based on the framework established in FAS 121. The
adoption of FAS 144 had no impact on the Company's financial statements.

In July 2002, the FASB issued Statement of Financial Accounting Standards
No. 146 (FAS 146), "Accounting for Exit or Disposal Activities". FAS 146
addresses the recognition, measurement, and reporting of costs that are
associated with exit and disposal activities, including costs related to
terminating a contract that is not a capital lease and termination benefits that
employees who are involuntarily terminated receive

28

under the terms of a one-time benefit arrangement that is not an ongoing benefit
arrangement or an individual deferred-compensation contract. FAS 146 supersedes
Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)" and requires liabilities associated
with exit and disposal activities to be expensed as incurred. FAS 146 will be
effective for exit or disposal activities of the Company that are initiated
after December 31, 2002. The Company will apply the provisions of FAS 146 to any
future restructuring activities.

In November 2002, the FASB issued FIN 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others". FIN 45 elaborates on required disclosures by a
guarantor in its financial statements about obligations under certain guarantees
it has issued and clarifies the need for a guarantor to recognize, at the
inception of certain guarantees, a liability for the fair value of the
obligation undertaken in issuing the guarantee. The interpretation is effective
for qualified guarantees entered into or modified after December 31, 2002. This
interpretation is not expected to have a material impact on the Company's
financial position, results of operations or cash flows. The disclosure
requirements of FIN 45 are effective for financial statements of interim or
annual periods ending after December 15, 2002. The Company has no guarantees
requiring disclosure under FIN 45 at December 31, 2002.

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 based
method of accounting for stock-based employee compensation. SFAS 148 also amends
the disclosure requirements of SFAS 123 to require more prominent disclosures in
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The transition guidance and annual disclosure provisions of SFAS 148
are effective for fiscal years ending after December 15, 2002 and for interim
periods beginning after December 15, 2002. See Item 8. "Financial Statements and
Supplementary Data -- Note 2 -- Summary of Significant Accounting Policies" and
"-- Note 13 -- Stock Based Compensation" for required disclosures.

In January 2003, the FASB issued 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 provision 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.

29

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*

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

* All references to "lives" in the table, whether reported as from existing
client loss, added from new contracts with existing clients or with new
clients, lives sold, lives sold eliminations/cross-sold lives, as lives
installed, or as lives installed eliminations/cross-installed lives are
derived by the Company from information provided to it by clients and may
contain estimates.
(1) Represents the net of losses from contract terminations and organic declines
in the clients' installed base measured in the number of persons covered by
clients, and gains from organic growth in the clients' installed base
measured in the number of persons covered by clients.
(2) "Lives sold eliminations/cross-sold lives" specifies the number of lives
subject to client contracts under which the Company provides or will provide
more than one healthcare recovery service to a client population. By
contrast, the number of lives reported in "Cumulative lives sold, end of
period" does not take into account instances in which multiple healthcare
recovery services are provided to the same client population.
(3) "Lives installed eliminations/cross-installed lives" specifies the number of
lives as to which the Company provides more than one healthcare recovery
service to a client population. By contrast, the number of lives reported in
"Lives installed, end of period" does not take into account instances in
which multiple healthcare recovery services are provided to the same client
population.

OTHER KEY OPERATING INDICATORS

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

(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, 2002, approximately $370.2 million of the backlog derived
from terminated clients and clients that, by that date, had given notice of
termination. See "Concentration of Clients".

30

(3) At December 31, 2001, approximately $133.0 million of the backlog derived
from terminated clients and clients that, by that date, had given notice of
termination.
(4) At December 31, 2000, approximately $126.4 million of the backlog derived
from terminated clients and clients that, by that date, had given notice of
termination.
(5) Throughput equals claims recoveries for the period divided by the average of
backlog at the beginning and end of the period.

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
revenues resulted from the increase in claims revenues described above and from
the change in the reporting structure of certain systems support personnel from
the Healthcare Recovery Services segment to Corporate Sales & Marketing. Prior
to January 1, 2002, those personnel performed support functions primarily
related to healthcare subrogation. Effective January 1, 2002, such personnel
moved under Corporate Sales & Marketing as they assumed a more active role in
the management of client data and as members of the client solutions team. Prior
year amounts have not been reclassified because management of the Company views
this as a change in position.

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
31

was due to the adoption of FAS 142 by the Company on January 1, 2002. See Item
8. "Financial Statements and Supplementary Data -- Note 8 -- 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".

2001 COMPARED TO 2000

Claims Revenues. Healthcare Recovery Services claims revenues for the year
ended December 31, 2001 increased 0.5%, to $64.0 million from $63.6 million in
2000. This growth in claims revenues occurred primarily because of a 0.5% growth
in healthcare claims recoveries, from $237.3 million in 2000 to $238.5 million
in 2001. The effective fee rate remained the same for the two years at 26.8%.

Total healthcare claims recoveries for 2001 increased approximately $1.2
million, or 0.5%, from 2000 healthcare claims recoveries. Healthcare subrogation
recoveries for 2001 were approximately $2.1 million, or 1.0%, more than in 2000,
primarily due to an increase in throughput. Provider bill audit recoveries
decreased approximately $1.2 million, or 3.9%, compared to 2000, in large part
due to hospital access issues encountered during the first three quarters of
2001. These access issues, which mainly stemmed from the delaying tactics of
hospitals that wanted to minimize the costs of being audited and potential
negative audit adjustments, were the primary reason that provider bill audit
backlog grew to be approximately 35% of total Healthcare Recovery Services
backlog as of December 31, 2001 compared to only 24% of total Healthcare
Recovery Services backlog as of December 31, 2000. Total Healthcare Recovery
Services backlog increased 19.7% to $1,414.8 million as of December 31, 2001
from $1,182.0 million as of December 31, 2000. Although most of the backlog
growth related to provider bill audit, healthcare subrogation backlog at
December 31, 2002 increased approximately $11.8 million, or 1.3%, compared to
December 31, 2000. The decline in Healthcare Recovery Services throughput from
20.9% in 2000 to 18.4% in 2001, was entirely attributable to the increase in
provider bill audit backlog, while related recoveries decreased.

The decrease in Healthcare Recovery Services installed lives from 48.7
million at December 31, 2000 to 45.5 million at December 31, 2001 was caused by
three factors. First, approximately 2.6 million lives were lost because clients
were acquired by non-clients. Second, approximately 2.0 million lives associated
with provider bill audit service clients which were not furnishing electronic
claims data to the Company and were, therefore, relatively unproductive, were
removed from the installed lives count. Third, approximately 1.3 million lives
from UHG and 1.5 million lives from a managed care health organization based in
the Northeast were terminated. These terminations did not, as a matter of
contract, result in a decrease to the backlog.

Cost of Revenues. Cost of revenues for the Healthcare Recovery Services
segment increased 2.3% in 2001 to $31.1 million from $30.4 million in 2000. As a
percentage of healthcare claims revenues, cost of revenues increased to 48.6% in
2001 from 47.7% in 2000. The increase in cost of revenues in total and as a
percentage of claims revenues in 2001 compared to 2000 was primarily due to
additional expenses for the investigation of files, including increases in
staffing levels for the provider bill audit and overpayment recovery services
related to new business sold during the year.

Support Expenses. Support expenses for the Healthcare Recovery Services
segment increased 80.4% to $4.9 million in 2001, from $2.7 million in 2000.
Support expenses as a percentage of claims revenues increased from 4.2% for the
year ended December 31, 2000 to 7.6% for the year ended December 31, 2001. Of
the $2.2 million increase in support expenses, approximately $1 million was
caused by a change in the reporting structure of certain systems support
personnel from Corporate to Healthcare Recovery Services, effective January 1,
2001. These systems personnel included programmers dedicated to the maintenance
of the legacy subrogation system and other systems personnel responsible for the
installation and maintenance of client data extracts. Of the remaining $1.2
million increase, approximately $1 million was attributable to an increase in

32

performance based incentive compensation and the remainder was due to growth in
support expenses related to the provider bill audit product.

Depreciation and Amortization. Depreciation and amortization expenses for
the Healthcare Recovery Services segment were $6.0 million for the year ended
December 31, 2001 compared to $5.7 million in 2000, an increase of 4.7%. The
increase was primarily due to the addition of intangible assets related to the
Subro Audit Acquisition final earn-out payment.

Other -- Litigation Settlement. In the fourth quarter of 2000, the Company
recorded a litigation settlement of approximately $3.0 million after it had
reached an agreement in principle to settle the DeGarmo class action litigation
against the Company in federal court in West Virginia. The settlement was paid
in July 2001. See Item 3. "Legal Proceedings".

Income before Income Taxes. Income before income taxes for the Healthcare
Recovery Services segment for the year ended December 31, 2001 of $22.3 million
was approximately $0.4 million or 1.9% more than income before income taxes of
$21.9 million for the year ended December 31, 2000. Increases in Cost of
Revenues and Support Expenses for the year ended December 31, 2001, compared to
the year ended December 31, 2000, described above offset the Litigation
Settlement expense, described above, incurred for the year ended December 31,
2000.

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

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

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

The new outsource client shown in the table above for 2002 is Safe Auto,
for which TransPaC Solutions will take over all subrogation recovery work as
well as Safe Auto's existing work-in-process. Safe Auto

33

reported direct written premiums of approximately $87.4 million in 2001. Safe
Auto currently has in place approximately 94,000 policies.

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

(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.

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.

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.

2001 COMPARED TO 2000

Claims Revenues. Total Property and Casualty Recovery Services revenues
for 2001 were $187,000, an increase of $176,000 over 2000. Property and Casualty
Recovery Services claims recoveries for the year ended December 31, 2001 were
$640,000, an increase of $602,000 over 2000. The increases in both revenues and
recoveries were due to the fact that TransPaC Solutions did not begin operations
until the quarter ended September 30, 2000.

34

The Property and Casualty Recovery Services effective fee rate for the year
ended December 31, 2001 increased to 29.2% from 29.0% for 2000.

Backlog. Backlog for the Property and Casualty Recovery Services segment
decreased to $3.6 million at December 31, 2001 from $4.1 million at December 31,
2000. The decrease in backlog from December 31, 2000 to December 31, 2001 was
due to the receipt of a large pending file project received and placed into
backlog in the last month of 2000.

The Property and Casualty Recovery Services segment had a throughput rate
of approximately 16.7% of average backlog for the year ended December 31, 2001.

Cost of Revenues. Cost of revenues for the Property and Casualty Recovery
Services segment increased 757% for the year ended December 31, 2001 to
$497,000, from $58,000 in 2000. As a percentage of claims revenues, cost of
revenues decreased to 266% in 2001 compared to 527% in 2000, 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 $754,000 in 2001 compared to $314,000 in 2000, primarily
due to the addition of management and other resources to support operations.
TransPaC began operations during the quarter ended September 30, 2000. Prior to
that time and for the year ended December 31, 2000, support expenses consisted
of sales resources and marketing expenses.

SOFTWARE

Results of Operations

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".

The Company expects to incur additional expenses of between $2.0 million
and $2.5 million for research and development with respect to the creation of
enhancements of existing software applications in 2003, of which approximately
$925,000 is expected to be capitalized. In addition, as of December 31, 2002,
the Company has capitalized approximately $2.4 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.

35

2001 COMPARED TO 2000

Support Expenses. The Company began development of new software products
during the quarter ended September 30, 2000. For the year ended December 31,
2000, support expenses consisted of sales and marketing related expenses.

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. For the year ended December 31, 2000, the Company incurred
approximately $0.5 million in costs related to research and development
activities of which approximately $0.1 million were capitalized, resulting in
net reported expenses of $0.4 million.

ENTIRE COMPANY

EMPLOYEES

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 8 -- 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 the year ended December 31,
2002 as it is a direct cost of software in service. For the year ended December
31, 2001, the corresponding depreciation and amortization was recorded in the
Depreciation and Amortization line item.

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

36

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".

2001 COMPARED TO 2000

Depreciation and Amortization. Depreciation and amortization expenses
increased 5.2% to $6.7 million for the year ended December 31, 2001 from $6.4
million in 2000. The increase in depreciation expense was attributable to the
purchased property and equipment and internally developed software related to
the system upgrades. The increase in amortization expense was attributable to
the addition of intangible assets related to the Subro Audit Acquisition final
earn-out payment.

Interest Income. Interest income decreased $0.3 million, or 28.9%, for the
year ended December 31, 2001 as compared to the year ended December 31, 2000.
The decrease was primarily due to the release of the restricted cash from the
Subro Audit Acquisition escrow account which was used to pay down long-term
debt.

Interest Expense. Interest expense totaled $0.9 million and $1.3 million
for the years ended December 31, 2001 and 2000, respectively. The decrease in
interest expense for 2001 resulted primarily from a decrease in long-term
borrowings due to the sale of the Wisconsin building and the release of
restricted cash from the Subro Audit Acquisition escrow account. Additionally,
the effective interest rate was approximately 2.1% lower during 2001 than during
2000.

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.

Other -- Special Committee Expenses. In August 1999, the Company's Board
of Directors appointed the Special Committee to evaluate strategic alternatives
available to the Company, including its possible sale. During the first quarter
of 2000, the Company incurred $90,000 of expenses related to the work of the
committee. In March 2000, after determining that the interests of the Company's
shareholders would be best served by focusing on building the Company's
business, the Special Committee ceased seeking a buyer for the Company and its
efforts to enhance shareholder value were assumed by the full Board of
Directors. See Item 8. "Financial Statements and Supplementary Data -- Note
16 -- Special Committee".

Tax. The provision for income taxes was approximately 31.3% of pre-tax
income for the year ended December 31, 2001 compared to 41.5% for the year ended
December 31, 2000. In September 2001, the Company concluded that in light of the
passage of time with respect to the filing of the Company's tax returns for
years up to and including 1997, it was proper to reverse previously accrued
taxes reducing the tax provision for the 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. The effective tax rates for 2001 (excluding
the reversal of previously accrued taxes described above) and 2000 exceeded the
Federal statutory tax rate as a consequence of state and local taxes and
non-deductible expenses.

Net Income. Net income for the year ended December 31, 2001 increased $1.0
million, or 29.5%, to $4.6 million or $0.46 per diluted share, from $3.6
million, or $0.33 per diluted share, for the year ended

37

December 31, 2000. Net income increased primarily as a result of the accrual of
$1.8 million of expenses, net of income taxes, at December 31, 2000 related to
the DeGarmo litigation settlement described above. However, the increase in net
income resulting from the DeGarmo litigation settlement was partially offset by
an increase in net after tax expenses related to the Company's business
development activities of approximately $1.1 million in 2001. In addition, there
were two significant, non-recurring items in 2001 which together resulted in an
increase to net income of $90,000: the loss on the disposal of property of
approximately $591,000, net of tax; and the reversal of income taxes previously
accrued for the non-cash compensation charge in 1997 of approximately $681,000,
net of tax.

LIQUIDITY AND CAPITAL RESOURCES

The Company's statements of cash flows for the years ended December 31,
2002, 2001 and 2000 are summarized below:

The Company had working capital of $8.8 million at December 31, 2002,
including cash and cash equivalents of $2.3 million, compared with working
capital of $10.4 million at December 31, 2001.

Net cash provided by operating activities increased $7.8 million for the
year ended December 31, 2002 over the year ended December 31, 2001 primarily as
a result of the $3.0 million litigation settlement that was accrued as an
expense in 2000 and paid in 2001. In addition, an increase of approximately $2.0
million in accrued expenses, primarily related to incentive compensation and
benefit accruals, including the healthcare self-insurance provision for future
claims that the Company began to accrue on January 1, 2002, contributed to the
increase in net cash provided by operating activities. Although accounts
receivable as of December 31, 2002 were approximately the same as the balance as
of December 31, 2001, the number of days' sales outstanding decreased from 55
days to 49 days because the Company resolved a collection issue with a provider
bill audit client. Net cash provided by operating activities for the year ended
December 31, 2001 of $6.0 million declined approximately $2.5 million from the
year ended December 31, 2000 primarily because of an increase in the accounts
receivable balance as well as in days' sales outstanding, this latter increase
being attributable to the 2001 provider bill audit collection issue described
above. Net cash provided by operating activities was used to repay amounts
outstanding under the Company's Revolving Credit Facility and to repurchase the
Company's common stock on the open market.

Net cash used in investing activities for the year ended December 31, 2002
includes purchases of property and equipment principally related to the
development and conversion to the Troveris software. The Company capitalized
approximately $2.0 million of internally-developed software during 2002 and
2001. During the year ended December 31, 2001, approximately $2.6 million had
been included as restricted cash to pay earn-outs related to the Subro Audit
Acquisition was released from restricted cash into operating cash as the
earn-outs had been paid in full.

Net cash used in financing activities for the years ended December 31, 2002
and 2001 reflects $4.0 million and $6.0 million in net cash repayments,
respectively, with respect to the Company's Revolving Credit Facility. The
Company repurchased approximately $6.5 million and $79,000 of treasury stock
during the years ended December 31, 2002 and 2001, respectively.

On November 1, 2001, the Company entered into a revolving credit facility
with National City Bank of Kentucky, Bank One Kentucky, N.A. and Fifth Third
Bank (the "Revolving Credit Facility"). The Company's obligations under the
Revolving Credit Facility are secured by substantially all of the Company's
assets, subject to certain permitted exceptions. The Revolving Credit Facility
carries a maximum borrowing

38

capacity of $40 million and will mature October 31, 2004. Principal amounts
outstanding under the Revolving Credit Facility will 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, 2002, the interest rate was 3.19%
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. It also contains
a material adverse change clause. At December 31, 2002, $4 million was
outstanding under the Revolving Credit Facility. See Item 8. "Financial
Statements and Supplementary Data -- Note 11 -- Derivatives" and "-- Note
12 -- Credit Facility".

At December 31, 2002 and 2001, the Company reported as a current asset on
its balance sheets, restricted cash of $17.8 million and $18.0 million,
respectively. Restricted cash at December 31, 2002 and 2001 represented claims
recoveries by the Company for its clients. At December 31, 2002 and 2001, the
Company reported on its balance sheets, as a current liability, funds due
clients of $12.4 million and $12.9 million, respectively, representing
recoveries to be distributed to clients, net of the fee earned on such
recoveries.

In light of its acquisition strategy, the Company is currently assessing
its opportunities for capital formation. The Company believes that its available
cash resources, together with the borrowings available under the Revolving
Credit Facility, will be sufficient to meet its current operating requirements
and acquisition and internal development activities. See Item 1. "Business --
Business Developments".

The following summarizes the Company's contractual obligations at December
31, 2002, and the effect such obligations are expected to have on its liquidity
and cash flows in future periods (in thousands):

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.

39

CONCENTRATION OF CLIENTS

The Company provides services to healthcare plans that as of December 31,
2002 covered approximately 41.6 million lives. The Company's clients are
national and regional healthcare payors, large third-party administrators or
self-insured corporations. The Company has two clients that individually
comprise more than 10% of the Company's revenue. The Company's largest source of
revenue is UnitedHealth Group ("UHG"). For the years ended December 31, 2002,
2001 and 2000, UnitedHealth Group generated 28%, 27% and 24% of the Company's
revenues, respectively. Wellpoint Health Network Inc. accounted for 14%, 11% and
7% of the Company's total revenues for the years ended December 31, 2002, 2001
and 2000, respectively as well as 32% and 40% of the Company's accounts
receivable balance at December 31, 2002 and 2001, respectively. HealthNet
accounted for 15% and 9% of the Company's accounts receivable balance at
December 31, 2002 and 2001, respectively.

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

The Company performs its services on a reasonable efforts basis and does
not obligate itself to deliver any specific result. Contracts with its customers
are generally terminable on 60 to 180 days' notice by either party, although in
a few cases the contracts extend over a period of years. The Company's contracts
generally provide that in the event of termination, the Company is entitled to
complete the recovery process on the existing backlog or to receive a cash
payment designed to approximate the gross margin that would otherwise have been
earned from the recovery on the backlog of the terminating client. On December
31, 2002, the Company had Healthcare Recovery Services backlog of $1,559.0
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 will be performed by
its Ingenix strategic business unit. 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. The Company's contract
with UHG expired in accordance with its terms on February 1, 2003 except with
respect to 1.8 million lives as to which the Company continues to provide
healthcare subrogation recovery services.

OTHER MATTERS

Resignation of Director

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

Stock Repurchase Plan

The Company's Board of Directors authorized the repurchase of up to $20
million of the Company's Common Stock in the open market, including $10 million
authorized on May 10, 2002, at prices per share deemed favorable by the Company.
Shares may be repurchased using cash from operations and borrowed funds and may
continue until such time as the Company has repurchased $20 million of the
Company's Common Stock or until it otherwise determines to terminate the stock
repurchase plan. The Company repurchased 1,304,743 shares of its own stock
during the year ended December 31, 2002, respectively, at an average price of
$4.96. From inception of the program through December 31, 2002, the total number
of repurchased shares is 3,097,008 at a cost of $13.6 million, or an average
cost of $4.39 per share. Except for

40

9,397 shares previously repurchased but re-issued in connection with an employee
restricted stock award, all of the reacquired shares of Common Stock through
December 31, 2002 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 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.

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 this firm. All
payments to Sharps & Associates are reviewed and approved by the Audit Committee
of the Company's Board of Directors. For the years ended December 31, 2002, 2001
and 2000, approximately $3,346,000, $3,385,000 and $2,484,000 was paid to this
law firm for such legal services, including all employees and expenses.

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

At Mr. McGinnis' request, following conversations with his lender, on
February 12, 1999, the Board of Directors approved a loan in the amount of
$350,000 to Mr. McGinnis, in exchange for a full recourse promissory note in the
same amount from Mr. McGinnis. On June 30, 2000, at the direction of the Board
of

41

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, 2002,
the promissory note of $886,520 and accrued interest of $39,908 were
outstanding.

On June 30, 2000, pursuant to the Board of Directors' authorization and in
accordance with the terms of the Amended Promissory Note, the Company and Mr.
McGinnis entered into a deferred compensation agreement (the "Agreement"). Under
the Agreement, 50% of the amount otherwise payable to Mr. McGinnis under the
Company's Management Group Incentive Compensation Plan is to be deferred until
the Amended Promissory Note is paid in full, with such deferred compensation
then being paid in full to Mr. McGinnis within 30 days thereafter. The Company
has full right of set-off against any deferred 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, 2002, the amount of deferred compensation was $72,354,
with accrued interest of $7,627.

ITEM 7A. QUANTITATIVE AND QUALITATIVE MARKET RISK DISCLOSURES

An element of market risk exists for the Company from changes in interest
rates related to its Revolving Credit Facility, which matures October 31, 2004.
The impact on earnings and the value of any debt on the Company's balance sheets
are subject to change as a result of movements in market rates and prices as the
Revolving Credit Facility is subject to variable interest rates. However, the
Company does not expect changes in interest rates to have a material effect on
its financial position, results of operations or cash flows in 2003. As of
December 31, 2002, 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). See Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources".

42

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders
Trover Solutions, Inc.

In our opinion, the accompanying balance sheets and the related statements
of income, changes in stockholders' equity and comprehensive income and cash
flows appearing on pages 44 through 47 of this annual report on Form 10-K
present fairly, in all material respects, the financial position of Trover
Solutions, Inc. (the "Company") at December 31, 2002 and 2001, and the results
of its operations and its cash flows for each of the three years in the period
ended December 31, 2002, 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
February 7, 2003

43

TROVER SOLUTIONS, INC.

BALANCE SHEETS
DECEMBER 31, 2002 AND 2001
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)

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

44

TROVER SOLUTIONS, INC.

STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE INFORMATION)

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

45

TROVER SOLUTIONS, INC.

STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND
COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(DOLLARS IN THOUSANDS)

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

46

TROVER SOLUTIONS, INC.

STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(DOLLARS IN THOUSANDS)

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

47

TROVER SOLUTIONS, INC.

NOTES TO FINANCIAL STATEMENTS

1. ORGANIZATION AND BASIS OF PRESENTATION

Trover Solutions, Inc., a Delaware corporation, was incorporated on June
30, 1988. The Company provides subrogation and certain other claims recovery and
cost containment services, on an outsourcing basis, to the private healthcare
payor industry and the property and casualty insurance industry. Its primary
business is medical claims recovery, and its primary product is subrogation
recovery, i.e., the Company identifies, investigates and recovers
accident-related medical benefits incurred by its healthcare payor and insurance
clients on behalf of their insureds, but for which other persons or entities
have primary responsibility. The Company's clients' rights to recover the value
of these medical benefits, arising by law or contract, are generally known as
the right of subrogation and are generally paid from the proceeds of liability
or workers' compensation insurance. The Company's other medical claims recovery
services include (1) the auditing of the bills of medical providers,
particularly hospitals, for accuracy, correctness and compliance with contract
terms ("provider bill audit"), (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.

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.

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NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

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

Depreciation expense for the years ended 2002, 2001 and 2000 was $4.1
million, $4.0 million, and $3.8 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 8,
"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 2002, 2001 and 2000 was
$1.1 million, $2.7 million, and $2.6 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
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.

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 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB
101). SAB 101 provides guidance on revenue recognition and related disclosures
and was effective beginning October 1, 2000. The Company was previously

49

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NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

following the requirements provided under SAB 101 and, accordingly, the
implementation of this pronouncement had no impact on the Company's financial
position or results of operations for 2002, 2001 or 2000.

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 and $366,000 of expenses related to research and
development during 2001 and 2000, respectively.

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 13. 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):

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

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NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

option grants, option exercises, and stock price volatility included in the
disclosures may not be indicative of actual future activity.

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):

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
947,834, 1,298,653 and 1,470,978 shares for the years ended December 31, 2002,
2001 and 2000, 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

Effective November 6, 2001, the Company adopted 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". 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 11 "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 gain on a cash flow hedge. See Note 11 "Derivatives".

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

Also, in June 2001, the FASB issued Statement of Financial Accounting
Standards No. 142 (FAS 142), "Goodwill and Other Intangible Assets", which
establishes the accounting for goodwill and other intangible assets following
their recognition. FAS 142 applies to all goodwill and other intangible assets
whether acquired singly, as part of a group, or in a business combination. FAS
142 provides that goodwill should not be amortized but should be tested for
impairment at the reporting unit annually, and at other times as events or
circumstances indicate an impairment may have occurred, using a fair-value based
approach. In addition, FAS 142 provides that other intangible assets other than
goodwill should be amortized over their useful lives and reviewed for
impairment. FAS 142 was effective for the Company beginning on January 1, 2002.
The Company was required to perform a transitional impairment test under FAS 142
for all goodwill recorded as of January 1, 2002. During the three months ended
June 30, 2002, the Company completed the transitional impairment test under FAS
142 for all goodwill recorded as of January 1, 2002. See Note 8 "Goodwill and
Other Intangible Assets".

In July 2001, the FASB issued Statement of Financial Accounting Standards
No. 143 (FAS 143), "Accounting for Asset Retirement Obligations". FAS 143 is
effective for fiscal years beginning after June 15, 2002, and provides
accounting requirements for asset retirement obligations associated with
tangible long-lived assets. The Company believes that the adoption of this
standard will not have a significant effect on its financial statements.

In October 2001, the FASB issued Statement of Financial Accounting
Standards No. 144 (FAS 144), "Accounting for the Impairment or Disposal of
Long-Lived Assets". FAS 144 is effective for fiscal years beginning after
December 15, 2001. This statement supersedes FAS 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of",
and the accounting and reporting provisions of APB Opinion No. 30, "Reporting
the Results of Operations -- Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions", for the disposal of a business segment. FAS 144 establishes a
single accounting model, based on the

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NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

framework established in FAS 121. The adoption of FAS 144 had no significant
impact on the Company's financial statements.

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

In November 2002, the FASB issued FIN 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others". FIN 45 elaborates on required disclosures by a
guarantor in its financial statements about obligations under certain guarantees
it has issued and clarifies the need for a guarantor to recognize, at the
inception of certain guarantees, a liability for the fair value of the
obligation undertaken in issuing the guarantee. The interpretation is effective
for qualified guarantees entered into or modified after December 31, 2002. This
interpretation is not expected to have a material impact on the Company's
financial position, results of operations or cash flows. The disclosure
requirements of FIN 45 are effective for financial statements of interim or
annual periods ending after December 15, 2002. The Company has no guarantees
requiring disclosure under FIN 45 at December 31, 2002.

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 based
method of accounting for stock-based employee compensation. SFAS 148 also amends
the disclosure requirements of SFAS 123 to require more prominent disclosures in
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The transition guidance and annual disclosure provisions of SFAS 148
are effective for fiscal years ending after December 15, 2002 and for interim
periods beginning after December 15, 2002. See "-- Stock Based Compensation
Plans" and Note 13 "Stock Based Compensation" for the disclosures required by
this statement.

In January 2003, the FASB issued 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 provision 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.

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.
53

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NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

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,
2002, 2001 and 2000 consists of the following (in thousands):

The following is a reconciliation of the effective tax rate to the federal
statutory rate for the years ended December 31, 2002, 2001 and 2000:

54

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NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Temporary differences giving rise to deferred taxes in the accompanying
balance sheets at December 31, 2002 and 2001 consist of the following (in
thousands):

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 accounted for 28%, 27% and 24% of the Company's total
revenues for the years ended December 31, 2002, 2001, and 2000, respectively.
Wellpoint Health Network Inc. accounted for 14%, 11% and 7% of the Company's
total revenues for the years ended December 31, 2002, 2001 and 2000,
respectively. No other client accounted for more than 10% of the Company's total
revenues. The loss of these clients could have a material adverse effect on the
Company's results of operations, financial position and cash flows.

Wellpoint Health Network Inc., which accounted for more than 65% of the
Company's revenue from its provider bill audit product in 2002 and 2001,
accounted for 31% and 40% of the Company's accounts receivable balance at
December 31, 2002 and 2001, respectively. In addition, HealthNet, which
accounted for 30% and 27% of the revenue from the provider bill audit product in
2002 and 2001, respectively, accounted for 15% and 9% of the Company's accounts
receivable balance at December 31, 2002 and 2001, 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, 2002 or 2001.

5. 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, 2002, 2001 and 2000, approximately $3,346,000, $3,385,000 and
$2,484,000, respectively, was paid to this law firm for such legal services,
including all employees and expenses.

55

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NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

On February 12, 1999, the Board of Directors approved a loan in the amount
of $350,000 to Patrick B. McGinnis, the Chairman and Chief Executive Officer of
the Company, in exchange for a full recourse promissory note in the same amount
from Mr. McGinnis. On June 30, 2000, at the direction of the Board of Directors
and in accordance with terms authorized by it, the Company loaned Mr. McGinnis
an additional $500,000. Under these terms, the $500,000 loan to Mr. McGinnis was
combined with his existing debt to the Company of $350,000 of principal and
$36,520 of accrued interest. Mr. McGinnis delivered to the Company his full
recourse promissory note in the amount of $886,520, bearing interest at a fixed
rate of 6.62% per annum, compounded annually (the "Amended Promissory Note"),
and the Company cancelled the old promissory note evidencing the prior debt. The
Amended Promissory Note provides for mandatory prepayments from certain of the
proceeds received by Mr. McGinnis from his sale of the Company's securities and
any related transactions. At December 31, 2002 and 2001, the promissory note of
$886,520 and accrued interest of $39,908 and $86,195 were outstanding,
respectively. Mr. McGinnis used the proceeds of these loans to repay debts
originally incurred by him to pay income taxes related to the ordinary income
deemed to have been received by him on account of Common Stock granted to him in
connection with the initial public offering of the Company's stock in May 1997,
and to purchase additional stock in the initial public offering.

On June 30, 2000, pursuant to 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, 2002 and 2001, the amount of deferred compensation was $72,354 and
$52,648, with accrued interest of $7,627 and $2,779, respectively.

6. PROPERTY AND EQUIPMENT

Property and equipment consists of the following at December 31, 2002 and
2001 (in thousands):

On November 13, 2001, the Company sold its building in New Berlin,
Wisconsin to a third party. The building was acquired on January 25, 1999 in the
Subro Audit Acquisition. The Company recorded a loss on the disposal of the
building of approximately $1.0 million during the year ended December 31, 2001.

7. ACQUISITIONS

On January 25, 1999, the Company acquired the assets and certain
liabilities of Subro-Audit, Inc., a Wisconsin corporation ("SAI"), and a related
entity, O'Donnell Leasing Co., LLP, a Wisconsin limited liability partnership
("ODL" and, together with SAI, "Subro Audit"), for approximately $24.4 million
(the
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TROVER SOLUTIONS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

"Subro Audit Acquisition"), using available unrestricted cash. The Company paid
an additional $5.3 million pursuant to an earn-out arrangement. The final amount
of $2.5 million was paid on June 7, 2001, and $2.8 million was paid on May 18,
2000. Approximately $4.7 million was held in escrow for the potential earn-out
and was included in restricted cash at December 31, 2000. SAI is based in
Wisconsin and provides subrogation recovery services with respect to an
installed base of lives, which are covered by insurers, HMOs and employer-funded
plans, throughout the United States of America. The Subro Audit Acquisition was
accounted for using the purchase method of accounting.

On February 15, 1999, the Company acquired the assets and certain
liabilities of MedCap Medical Cost Management, Inc., a California corporation
("MedCap"), for approximately $10 million, using available unrestricted cash and
borrowed funds (the "MedCap Acquisition" and, together with the Subro Audit
Acquisition, the "Acquisitions"). The Company paid approximately $4.8 million
from February 15, 2000 through January 15, 2001 pursuant to an amendment to the
original earn-out agreement. MedCap provides a variety of medical cost
management services to health insurers and HMOs, primarily in California. These
services include provider bill auditing, contract compliance review,
identification of certain other payments, and cost management consulting
services. The MedCap Acquisition was accounted for using the purchase method of
accounting.

8. 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 which is a two step process. The first step involves determining the
estimated fair value of each reporting unit with a view to determining whether
the Goodwill value has been impaired under FAS 142. The second step measures the
amount of impairment and is required only if impairment is indicated by the
first step.

The Company engaged the services of a third party valuation firm to
complete an analysis of the fair value of the reporting units during the first
half of 2002. The completion of step one during the three months ended June 30,
2002, did not result in an impairment charge for the Company. The Company will
perform its annual impairment review during the second quarter of each year,
commencing in the second quarter of 2003. The Company's reporting units are
generally consistent with the operating segments underlying the segments
identified in Note 17 "Segment Information". All recorded Goodwill and Other
Intangible Assets relate to the Healthcare Recovery Services segment.

57

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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, 2002, 2001 and 2000 (in thousands, except per share amounts):

The carrying value of Goodwill, net was approximately $29.1 million at
December 31, 2002 and 2001.

The Company's intangible assets (other than Goodwill, net) are subject to
amortization. The details of the Company's intangible assets at December 31,
2002 and December 31, 2001 are as follows (in thousands):

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, 2002, 2001 and 2000 was approximately $562,000 for each year. Over
the five succeeding fiscal years, amortization expense related to intangible
assets is expected to be as follows (in thousands):

Year ending December 31:
2003........................................................ $496
2004........................................................ 340
2005........................................................ 327
2006........................................................ 327
2007........................................................ 327

9. 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 loss from future
claims under this self-insurance program is based upon an independent actuarial
estimate.

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NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

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 $524,000 at
December 31, 2002 is recorded in Accrued Expenses as a current liability in the
accompanying Balance Sheet.

10. 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, 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. For the year ended December 31, 2000, the
Company match was made in common stock of the Company, up to 6% of the
participant's annual compensation. Total retirement plan expense was
approximately $785,900, $707,100 and $818,300 for the years ended December 31,
2002, 2001 and 2000, respectively.

OTHER

Accrued bonuses included in the accompanying balance sheets at December 31,
2002 and 2001 approximate $3.7 million and $3.5 million, respectively.

11. 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 December 31, 2002 and in "Other Assets" at December
31, 2001 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.

59

TROVER SOLUTIONS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

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, 2002, the fair value of the hedge was a liability of
$144,804 (($86,882), net of tax, included in Other Comprehensive Income (Loss)).
At December 31, 2001, the fair value of the hedge was an asset of $45,446
($26,586, net of tax, included in Other Comprehensive Income).

12. 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
secured by substantially all of the Company's assets, subject to certain
permitted exceptions. The Revolving Credit Facility carries a maximum borrowing
capacity of $40 million and will mature October 31, 2004. Principal amounts
outstanding under the Revolving Credit Facility bear interest at a variable rate
based on the Prime Rate or Eurodollar Rate, as applicable, plus a pre-determined
fixed margin. At December 31, 2002, the interest rate was 3.19% 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. It also contains a material
adverse change clause. At December 31, 2002 and 2001, $4 million and $8 million,
respectively, was outstanding under the Revolving Credit Facility.

13. STOCK BASED COMPENSATION

In May 1997, the Company adopted the Trover Solutions, Inc. Non-Qualified
Stock Option Plan for Eligible Employees (the "Employees' Plan"), the Trover
Solutions, Inc. Amended and Restated Directors' Stock Option Plan (the
"Directors' Plan") and the Trover Solutions, Inc. Employee Stock Purchase Plan
(the "Purchase Plan"). On December 8, 1997, the Company adopted the Trover
Solutions, Inc. 1997 Stock Option Plan for Eligible Participants (the "1997
Plan"). On May 10, 2002, the Company adopted the Trover Solutions, Inc. 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, 2002, 673,750 shares of Common Stock were reserved for issuance under the
Employees' Plan, including 161,383 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 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
60

TROVER SOLUTIONS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

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, 2002, 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, 2002, 1,689,198 shares of Common Stock have been reserved under the 1997
Plan, of which 47,330 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, 2002, 247,520 shares
of Common Stock have been reserved under the 2002 Outside Directors Stock Plan,
of which 232,520 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, 2002, 2001
and 2000 is summarized as follows:

As of December 31, 2002, 2001 and 2000 there were 1.6 million, 1.4 million
and 1.0 million options exercisable, respectively.

61

TROVER SOLUTIONS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

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, 2002:

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:

As of December 31, 2002, 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 $13,000 for the year ended December
31, 2002.

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, 2002, 2001 and 2000, employees paid the Company $89,000, $91,000
and $92,000, respectively, to purchase 22,608 shares, 35,782 shares and 29,929
shares, respectively. As of December 31, 2002, there were 194,224 shares of
Common Stock reserved for future purchase under the Purchase Plan.

14. STOCK REPURCHASE PLAN

The Company's Board of Directors authorized the repurchase of up to $20
million of the Company's Common Stock in the open market, including $10 million
authorized on May 10, 2002, at prices per share deemed favorable by the Company.
Shares may be repurchased using cash from operations and borrowed funds and may
continue until such time as the Company has repurchased $20 million of the
Company's Common Stock or until it otherwise determines to terminate the stock
repurchase plan. The Company repurchased 1,304,743 shares of its own stock
during the year ended December 31, 2002 at an average price of $4.96. From
inception of the program through December 31, 2002, the total repurchased shares
are 3,097,008
62

TROVER SOLUTIONS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

at a cost of $13.6 million, or an average cost of $4.39 per share. Except for
9,397 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, 2002 are reflected as treasury stock on the accompanying
Balance Sheets.

15. OTHER COMPREHENSIVE INCOME (LOSS)

Other comprehensive income (loss) for the years ended December 31, 2002,
2001 and 2000 consists of the following (in thousands):

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

16. SPECIAL COMMITTEE

In August 1999, the Board of Directors appointed a Special Committee to
evaluate strategic alternatives available to the Company, including its possible
sale. In March 2000, the Special Committee ceased seeking a buyer for the
Company and its efforts to enhance shareholder value were assumed by the full
Board of Directors. The Company incurred $90,000 of expenses related to the work
of the Special Committee during 2000.

17. 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 has three reportable segments
based on qualitative guidelines. The Company's three segments are: (1)
Healthcare Recovery Services, which encompasses its healthcare recovery
products: healthcare subrogation, provider bill audit, overpayment recoveries,
and MD Audit; (2) Property and Casualty Recovery Services, which includes
subrogation recovery services for property and casualty insurers, which the
Company sells under the name TransPaC Solutions; and

63

TROVER SOLUTIONS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

(3) Software, which includes the sale of subrogation recovery software in a
browser-based application service provider (ASP) form. The segment profit
measure is income before income taxes.

Segment results for the years ended December 31, 2002, 2001 and 2000 are as
follows (in thousands):

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.

64

TROVER SOLUTIONS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

18. 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, 2002 are as follows (in thousands):

2003........................................................ $2,250
2004........................................................ 2,206
2005........................................................ 2,227
2006........................................................ 2,301
2007........................................................ 1,815
Thereafter.................................................. 1,331

Rental expense, which includes amounts applicable to short-term leases, was
approximately $2,386,000, $2,092,000, and $1,951,000 for the years ended
December 31, 2002, 2001 and 2000, respectively.

19. 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.

20. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

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

65

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES

None

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by this Item with respect to Directors and
Executive Officers of the Registrant is included in the sections entitled
"Proposal 1 -- Election of Directors", "Executive Officers", and "Other
Matters -- Section 16(a) Beneficial Ownership Reporting Compliance" of the Proxy
Statement for the Annual Meeting of Stockholders to be held on May 9, 2003 and
is incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this Item is included in the sections entitled
"Executive Compensation", "Stock Option Grants", "Stock Option Exercises",
"Corporate Governance -- Directors' Compensation", "Employment Agreements", and
"Compensation Committee Interlocks and Insider Participation" of the Proxy
Statement for the Annual Meeting of Stockholders to be held on May 9, 2003 and
is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS

The information required by this Item is included in the sections entitled
"Equity Compensation Plan Information", "Management Common Stock Ownership" and
"Principal Stockholders" of the Proxy Statement for the Annual Meeting of
Stockholders to be held on May 9, 2003 and in Item 8. "Financial Statements and
Supplementary Data -- Note 13 -- Stock Based Compensation" and is incorporated
herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this Item is included in the sections entitled
"Executive Compensation", "Employment Agreements" and "Certain Relationships and
Related Transactions" of the Proxy Statement for the Annual Meeting of
Stockholders to be held on May 9, 2003 and is incorporated herein by reference.

ITEM 14. CONTROLS AND PROCEDURES

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

66

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) 1. Financial Statements

Report of Independent Accountants

Balance Sheets -- years ended December 31, 2002 and 2001

Statements of Income -- years ended December 31, 2002, 2001 and 2000

Statements of Changes in Stockholders' Equity and Comprehensive
Income -- years ended December 31, 2002, 2001 and 2000

Statements of Cash Flow -- years ended December 31, 2002, 2001 and
2000

2. Financial Statement Schedules (none required)

3. Exhibits

67

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).
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).
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).
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.

68

10.9 -- Trover Solutions, Inc. Retirement Savings Plan.
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.
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.
10.17 -- Employment Agreement between the Registrant and Patrick B.
McGinnis, dated January 1, 2003.
10.18 -- Severance Agreement between the Registrant and Mark J.
Bates, Dated March 12, 2003.
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).
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).
23.1 -- Consent of PricewaterhouseCoopers LLP.
99.1 -- Trover Solutions, Inc. Private Securities Litigation Reform
Act of 1995 Safe Harbor Compliance Statement for
Forward-Looking Statements.
99.2 -- Certifications Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.

(b) Reports on Form 8-K

No reports filed during the fourth quarter of 2002.

69

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 27, 2003

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:

70

CERTIFICATIONS

I, Patrick B. McGinnis, certify that:

1. I have reviewed this annual report on Form 10-K of Trover Solutions,
Inc.;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:

a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;

b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and

c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;

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

a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and

b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and

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

/s/ PATRICK B. MCGINNIS
--------------------------------------
Patrick B. McGinnis
Chairman, President and Chief
Executive Officer

Date: March 27, 2003

71

I, Douglas R. Sharps, certify that:

1. I have reviewed this annual report on Form 10-K of Trover Solutions,
Inc.;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:

a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;

b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and

c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;

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

a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and

b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and

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

/s/ DOUGLAS R. SHARPS
--------------------------------------
Douglas R. Sharps
Executive Vice President and Chief
Financial Officer
Principal Financial and Accounting
Officer

Date: March 27, 2003

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