Note A - Summary of Significant Accounting Policies

Organization: CorVel Corporation (CorVel or the Company) provides services and programs nationwide that are designed to enable insurance carriers, third party administrators and employers with self-insured programs to administer, manage and control the cost of workers' compensation and other healthcare benefits.

Basis of Presentation: The consolidated financial statements include the accounts of CorVel and its subsidiaries. Significant intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates: The preparation of financial statements in conforming with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the accompanying financial statements. Actual results could differ from those estimates.

Cash and Cash Equivalents: Cash and cash equivalents consists of short-term highly-liquid investments with maturities of 90 days or less when purchased. The carrying amounts of the Company's financial instruments approximate their relative fair values at March 31, 2000 and 2001.

Revenue Recognition: The Company's revenues are recognized primarily as services are rendered based on time and expenses incurred. A certain portion of the Company's revenues are derived from fee schedule auditing which is based on the number of provider charges audited and, to a limited extent, on a percentage of savings achieved for the Company's clients. Accounts receivable includes $2,486,000 and $3,749,000 of unbilled receivables at March 31, 2000 and 2001, respectively. No one customer accounted for more than 10% of consolidated revenues during the years ended March 31, 1999, 2000 and 2001.

Property and Equipment: Additions to property and equipment are recorded at cost. Depreciation and amortization are provided using the straight-line and accelerated methods over the estimated useful lives of the related assets which range from three to seven years.

Long-Lived Assets: The carrying amount of all long-lived assets is evaluated periodically to determine if adjustment to the depreciation and amortization period or to the unamortized balance is warranted. Such evaluation is based principally on the expected utilization of the long-lived assets and the projected, undiscounted cash flows of the operations in which the long-lived assets are deployed.

Other Assets: Other assets consists primarily of the excess of the purchase price over the estimated fair value of the net assets of businesses acquired (goodwill) and is being amortized using the straight-line method over periods not exceeding 40 years. Goodwill amounted to $6,013,000 (net of accumulated amortization of $1,736,000) at March 31, 2000 and $5,978,000 (net of accumulated amortization of $1,672,000) at March 31, 2001.

Concentrations of Credit Risk: The Company performs periodic credit evaluations of its customers' financial condition and does not require collateral. No other single customer accounted for 10% of accounts receivable in 2000 or 2001. Receivables are generally due within 60 days. Credit losses relating to customers in the workers' compensation insurance industry consistently have been within management's expectations.

Income Taxes: The Company provides for income taxes under the liability method. Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities as measured by the enacted tax rates which are expected to be in effect when these differences reverse. Income tax expense is the tax payable for the period and the change during the period in net deferred tax assets and liabilities.

Earnings Per Share: Earnings per common share-basic is based on the weighted average number of common shares outstanding during the period. Earnings per common shares-diluted is based on the weighted average number of common shares and common share equivalents outstanding during the period. In calculating earnings per share, earnings are the same for the basic and diluted calculations. Weighted average shares outstanding increased for diluted earnings due to the effect of stock options.

Stock Option Plans: The Company applies the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123) and accordingly, is continuing to account for its stock-based compensation plans under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations.

In 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 133 ("SFAS 133"), Accounting for Derivative Instruments and Hedging Activities, which is effective for 2000. SFAS 133 will require the Company to record all derivatives on the balance sheet at fair value. For derivatives that are hedges, changes in the fair value of derivatives will be offset by the changes in the fair value of the hedged assets, liabilities or firm commitments. The new standard, as amended by SFAS 137 and SFAS 138, is effective for fiscal years beginning after June 15, 2000. The Company believes the impact of adopting this standard will not be material to results of operations or equity.

Note B - Property and Equipment

Property and equipment consists of the following at March 31:

	2000	2001
Office equipment and computers	$30,851,000	$27,560,000
Computer software	13,735,000	14,201,000
Leasehold improvements	1,460,000	1,731,000
	46,046,000	43,492,000
Less: accumulated depreciation and amortization	29,415,000	23,421,000
	$16,631,000	$20,071,000

Note C - Accrued Liabilities

Accrued liabilities consists of the following at March 31:

	2000	2001
Payroll and related benefits	$4,495,000	$9,401,000
Self-insurance accruals	829,000	1,610,000
Other	2,251,000	1,221,000
	$7,575,000	$12,232,000

Note D - Income Taxes

The income tax provision consists of the following for the three years ended March 31:

	1999	2000	2001
Current - Federal	$6,337,000	$6,745,000	$7,010,000
Current - State	627,000	722,000	620,000
Subtotal	6,964,000	7,467,000	7,630,000
Deferred - Federal	(537,000)	(118,000)	277,000
Deferred - State	(51,000)	(13,000)	26,000
Subtotal	(588,000)	(131,000)	303,000
	$6,376,000	$7,336,000	$7,933,000

Income tax benefits associated with the exercise of stock options were $289,000, $577,000 and $673,000 for fiscal 1999, 2000, and 2001, respectively.

The following is a reconciliation of the income tax provision from the statutory federal income tax rate to the effective rate for the three years ended March 31:

	1999	2000	2001
Income taxes at federal statutory rate	$5,873,000	$6,756,000	$7,404,000
State income taxes, net of federal benefit	471,000	465,000	646,000
Goodwill amortization	45,000	115,000	47,000
Other	(13,000)	-	(164,000)
	$6,376,000	$7,336,000	$7,933,000

Income taxes paid totaled $4,787,000, $9,307,000 and $7,570,000 for the years ended March 31, 1999, 2000, and 2001, respectively.

Deferred taxes at March 31, 2000 and 2001 are:

	2000	2001
Deferred tax assets:
Accrued liabilities not currently deductible	$2,432,000	$2,806,000
Allowance for doubtful accounts	1,207,000	1,321,000
Other	194,000	3,000
Deferred assets	3,833,000	4,130,000
Deferred tax liabilities:
Excess of tax under book basis of fixed assets	(2,619,000)	(3,067,000)
Other	(390,000)	(542,000)
Deferred liability	(3,009,000)	(3,609,000)
Net deferred tax asset	$824,000	$521,000

Note E - Stock Option Plans

The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB No. 25) and related interpretations in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under SFAS No. 123 requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB No. 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized.

Under the Company's Restated 1988 Executive Stock Option Plan, ("the Plan") as amended, options for up to 3,470,000 shares of the Company's common stock may be granted to key employees, nonemployee directors and consultants at prices not less than 85% of the fair value of the stock at the date of grant as determined by the Board. Options granted under the Plan may be either incentive stock options or non-statutory stock options and are generally exercisable beginning one year from the date of grant and vest monthly thereafter for three years.

In addition to the Plan, the Company's President was issued an option to purchase 1,500,000 shares of common stock at an exercise price of $.0001 per share in January 1988. As of March 31, 2001, all of these options have vested and have been exercised. Summarized information for all stock options for the past three fiscal year follows:

	1999	2000	2001
Options outstanding at the beginning of the year	761,932	796,406	789,343
Options granted	219,100	175,500	193,700
Options exercised	(149,554)	(164,313)	(187,396)
Options cancelled	(35,072)	(18,250)	(58,984)
Options outstanding at the end of the year	796,406	789,343	736,663
During the year, weighted average price of options:
Granted	$18.09	$21.13	$28.54
Exercised	$10.55	$12.41	$15.08
Cancelled	$15.20	$17.52	$19.54
At the end of the year:
Price range of outstanding options	$8.50-$18.88	$8.50-$23.6	$8.50-$34.75
Weighted average price per share	$15.13	$16.99	$20.30
Options available for future grants	625,598	468,348	334,579
Exercisable options	333,764	339,889	321,627

The following table summarizes the status of stock options outstanding and exercisable at March 31, 2001:

Range of Exercise Prices	Number of Outstanding Options	Weighted Average Remaining Contractual Life	Outstanding Options - Weighted Average Exercise Price	Exercisable Options - Number of Exercisable Options	Exercisable Options - Weighted Average Exercise Price
$8.50-$15.50	175,720	2.92 years	$13.59	127,781	$13.55
17.44-18.00	151,57	2.31 years	17.84	93,998	17.82
18.09-23.63	221,721	3.56 years	20.33	99,848	19.77
26.25-34.75	186,700	4.78 years	28.59	-	-
Total	735,716	3.39 years	$20.09	321,627	$16.73

The Company has adopted the disclosure-only provisions of SFAS No. 123. Had compensation cost for the Company's stock option and stock purchase plans been recorded consistent with the provisions of SFAS No. 123, net income, net income per share-basic and net income per common share-diluted would have been for the three fiscal years ending March 31:

	1999	2000	2001
Net income - adjusted	$9,971,000	$11,406,000	$12,584,000
Net income per share - basic	$1.22	$1.42	$1.66
Net income per share - diluted	$1.21	$1.40	$1.62

The weighted average fair values at date of grant for options during fiscal 1999, 2000, and 2001, were $6.28, $6.56, and $9.59, respectively.

The fair value of each plan is estimated on the date of grant using the Black-Scholes option-pricing model. The following weighted average assumptions were used for fiscal years ending March 31:

	1999	2000	2001
Expected volatility	.28	.37	.41
Risk free interest rate	5.7%	6.6%	4.8%

The assumptions for all three years reflect no dividend yield and a weighted average option life of 4.7 years.

The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjecting assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.

Note F - Employee Stock Purchase Plan

The Company maintains an Employee Stock Purchase Plan which allows employees of the Company and its subsidiaries to purchase shares of common stock on the last day of two six-month purchase periods (i.e. March 31 and September 30) at a purchase price which is 85% of the closing sale price of shares as quoted on NASDAQ on the first or last day of such purchase period, whichever is lower. Employees are allowed to participate up to 20% of their gross pay. A maximum of 500,000 shares has been authorized for issuance under the plan, as amended. As of March 31, 1999, 339,000 shares had been issued pursuant to the plan. Summarized plan information is as follows:

	1999	2000	2001
Employee contributions	$541,000	$588,000	$687,000
Shares acquired	34,428	34,800	30,072
Average purchase price	$15.71	$16.90	$22.85

Note G - Treasury Stock

The Company's Board of Directors has approved a plan to repurchase up to 3,400,000 shares of the Company's outstanding common stock. Purchases may be made from time to time depending on market conditions and other relevant factors. The share repurchases for fiscal years ending March 31, 1999, 2000 and 2001 are as follows:

	1999	2000	2001	Cumulative
Shares repurchased	286,080	586,060	474,600	2,807,940
Cost	$ 5,263,000	$12,966,000	$13,947,000	$53,932,000
Average price	$18.40	$22.12	$29.38	$19.21

The repurchased shares were recorded as treasury stock, at cost, and is available for general corporate purposes. The repurchases were financed from cash generated from operations.

Note H - Commitments and Contingencies

The Company leases office facilities under noncancelable operating leases. Future minimum rental commitments under operating leases at March 31, 2001 are $7,202,000 in fiscal 2002, $5,574,000 in fiscal 2003, $3,878,000 in fiscal 2004, $2,757,000 in fiscal 2005, $1,802,000 in fiscal 2006, and $827,000 thereafter. Total rental expense of $6,100,000, $7,100,000, and $8,685,000 was charged to operations for the years ended March 31, 1999, 2000, and 2001, respectively.

The Company is involved in litigation arising in the normal course of business. The Company believes that resolution of these matters will not result in any payment that, in the aggregate, would be material to the financial position and results of the operations of the Company.

Note I - Savings Plan

The Company maintains a retirement savings plan for its employees, which is a qualified plan under Section 401(k) of the Internal Revenue Code. Full-time employees that meet certain requirements are eligible to participate in the plan. Contributions are made annually primarily at the discretion of the Company's Board of Directors. Contributions of $155,000, $199,000, and $224,000, were charged to operations for the years ended March 31, 1999, 2000 and 2001, respectively.

Note J - Shareholder Rights Plan

During fiscal 1997, the Company's Board of Directors approved the adoption of a Shareholder Rights Plan. The Rights Plan, which is similar to rights plans adopted by numerous other public companies, provides for a dividend distribution to CorVel stockholders of one preferred stock purchase "Right" for each outstanding share of CorVel's common stock. The Rights are designed to assure that all stockholders receive fair and equal treatment in the event of any proposed takeover of the company and to encourage a potential acquirer to negotiate with the Board of Directors prior to attempting a takeover. The Rights have an exercise price of $62.50 per Right, as adjusted for the 2-for-1 stock split in the form of a 100% stock dividend, paid on June 14, 1999, and subject to subsequent adjustment. Initially, the Rights will trade with the company's common stock, and will not be exercisable until the occurrence of certain takeover-related events. The issuance of the Rights has no dilutive effect on the Company's earnings per share.

Note K - Quarterly Results

The following is a summary of unaudited results of operations for the two years ended March 31, 2000 and 2001:

Fiscal Year Ended March 31, 2000:
	Revenues	GrossMargin	Net Income	Net income per basic commonshare	Net income per diluted common share
First Quarter	$45,705,000	$8,251,000	$2,877,000	$.35	$.35
Second Quarter	45,865,000	8,406,000	2,970,000	.37	.36
Third Quarter	46,269,000	8,487,000	3,013,000	.38	.37
Fourth Quarter	48,926,000	8,911,000	3,107,000	.40	.39
Fiscal Year Ended March 31, 2001:
First Quarter	$50,557,000	9,328,000	$3,227,000	$.42	$.41
Second Quarter	51,658,000	9,347,000	3,272,000	.43	.42
Third Quarter	52,241,000	9,059,000	3,328,000	.44	.43
Fourth Quarter	55,098,000	9,810,000	3,395,000	.45	.44