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 self-insured 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, 2001 and 2002.

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 $3,749,000 and $3,267,000 of unbilled receivables at March 31, 2001 and 2002, respectively. No one customer accounted for more than 10% of consolidated revenues during the years ended March 31, 2000, 2001 and 2002.

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.

The Company capitalized software development costs, intended for internal use, totaling $3,250,000 and $4,704,000 for the years ended March 31, 2001 and 2002, respectively. These costs are included in computer software in property and equipment and are amortized over a period of five 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 $5,978,000 (net of accumulated amortization of $1,672,000) at March 31, 2001 and $5,775,000 (net of accumulated amortization of $2,047,000) at March 31, 2002.

Concentrations of Credit Risk: The Company performs periodic credit evaluations of its customers' financial condition and does not require collateral. No single customer accounted for 10% of accounts receivable in 2001 or 2002. 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 are increased for diluted earnings calculations to reflect the effect of stock options.

All common shares outstanding and earnings per shares have been adjusted to reflect the three-for-two stock split in the form of a 50% dividend paid in August 2001.

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.

Recent Pronouncements: In July, 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." These statements make significant changes to the accounting for business combinations, goodwill, and intangible assets. SFAS No. 141 establishes new standards for accounting and reporting requirements for business combinations and will require that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Use of the pooling-of-interests method will be prohibited.

SFAS No. 142 establishes new standards for goodwill acquired in a business combination and eliminates amortization of goodwill and instead sets forth methods to periodically evaluate goodwill for impairment. Intangible assets with a determinable useful life will be continue to be amortized over that period. The Company expects to adopt SFAS 142 during the first quarter of fiscal 2003. Management is in the process of evaluating the requirements of this statement. The final determination of the impact of these statements has not been completed.

In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard (SFAS) No. 143, "Accounting for Asset Retirement Obligations." This statement addresses the financial accounting and reporting for the retirement of tangible long-lived assets and the associated asset retirement costs. The Company believes the adoption of SFAS 143 will have no significant impact on its financial statements.

In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard (SFAS) No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This statement addresses the financial accounting and reporting for the impairment or disposal of long-lived assets. The Company believes the adoption of SFAS 144 will have no significant impact on its financial statements.

Note B - Property and Equipment

Property and equipment consists of the following at March 31:

	2001	2002
Office equipment and computers	$27,560,000	$31,775,000
Computer software	14,201,000	20,019,000
Leasehold improvements	1,731,000	2,004,000
	43,492,000	53,798,000
Less: accumulated depreciation and amortization	23,421,000	31,317,000
	$20,071,000	$22,481,000

Note C - Accrued Liabilities

Accrued liabilities consists of the following at March 31:

	2001	2002
Payroll and related benefits	$9,401,000	$8,623,000
Self-insurance accruals	2,131,000	3,029,000
Other	700,000	553,000
	$12,232,000	$12,205,000

Note D - Income Taxes

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

	2000	2001	2002
Current - Federal	$6,745,000	$7,010,000	$8,226,000
Current - State	722,000	620,000	897,000
Subtotal	7,467,000	7,630,000	9,123,000
Deferred - Federal	(118,000)	277,000	(36,000)
Deferred - State	(13,000)	26,000	(4,000)
Subtotal	(131,000)	303,000	(40,000)
	$7,336,000	$7,933,000	$9,083,000

Income tax benefits associated with the exercise of stock options were $577,000, $673,000 and $606,000 for fiscal 2000, 2001, and 2002, 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:

	2000	2001	2002
Income taxes at federal statutory rate	$6,756,000	$7,404,000	$8,336,000
State income taxes, net of federal benefit	465,000	646,000	893,000
Goodwill amortization	115,000	47,000	40,000
Other	-	(164,000)	(186,000)
	$7,336,000	$7,933,000	$9,083,000

Income taxes paid totaled $9,307,000, $7,570,000 and $7,910,000 for the years ended March 31, 2000, 2001, and 2002, respectively.

Deferred taxes at March 31, 2001 and 2002 are:

	2001	2002
Deferred tax assets:
Accrued liabilities not currently deductible	$2,806,000	$2,849,000
Allowance for doubtful accounts	1,321,000	1,385,000
Other	3,000	2,000
Deferred assets	4,130,000	4,236,000
Deferred tax liabilities:
Excess of tax under book basis of fixed assets	(3,067,000)	(3,205,000)
Other	(542,000)	(470,000)
Deferred liability	(3,609,000)	(3,675,000)
Net deferred tax asset	$521,000	$561,000

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 5,955,000 shares (adjusted for the three-for-two stock split in the form of a 50% stock dividend in August 2001) of the Company's common stock may be granted to key employees, non employee 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.

Summarized information for all stock options for the past three fiscal year follows:

	2000	2001	2002
Options outstanding at the beginning of the year	1,194,609	1,184,014	1,104,994
Options granted	263,250	290,550	278,702
Options exercised	(246,470)	(281,094)	(146,988)
Options cancelled	(27,375)	(88,476)	(18,620)
Options outstanding at the end of the year	1,184,014	1,104,994	1,218,088
During the year, weighted average price of options:
Granted	$14.09	$19.03	$26.82
Exercised	8.27	10.05	10.88
Cancelled	11.68	13.03	16.23
At the end of the year:
Price range of outstanding options	$5.67-$15.75	$5.67-$23.17	$5.67-$30.55
Weighted average price per share	$11.33	$13.53	$16.86
Options available for future grants	702,522	501,869	990,317
Exercisable options	509,834	482,441	587,803

The following table summarizes the status of stock options outstanding and exercisable at March 31, 2002:

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
$ 5.67 -$12.00	371,248	2.14 years	$10.48	290,305	$10.68
12.01 - 16.00	301,697	2.65 years	13.57	204,481	13.31
16.01 - 24.00	267,641	3.80 years	19.07	93,017	18.75
24.01 - 30.55	277,502	4.78 years	26.83	-	-
Total	1,218,088	3.23 years	$16.86	587,803	$12.87

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 as follows for the three fiscal years ending March 31:

	2000	2001	2002
Net income - adjusted	$11,406,000	$12,584,000	$14,016,000
Net income per share - basic	$0.95	$1.11	$1.27
Net income per share - diluted	$0.93	$1.08	$1.23

The weighted average fair values at date of grant for options during fiscal 2000, 2001, and 2002, were $4.37, $6.39, and $6.38, respectively.

The fair value of each option 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:

	2000	2001	2002
Expected volatility	.37	.41	.28
Risk free interest rate	6.6%	4.8%	4.3%

The assumptions for all three years reflect no dividend yield and a weighted average option life of 4.7 years for fiscal 2000 and 2001, and 4.6 years for fiscal 2002.

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 subjective 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.

The number of shares to be issued, the weighted average exercise price of outstanding options, and the number of securities remaining available for future issuance under all stock option plans, including the 1991 Employee Stock Purchase Plan described in Note F below are as follows:

 

	Number of Securities to be issued upon exercised of outstanding options, warrants and rights	Weighted-average exercise price of outstanding options, warrants and rights	Number of securities remaining available for future issuance under equity cmpensation plans
Plan category
Equity compensation plans approved by security holders	1,218,088	$16.86	1,149,910
Equity compensation plans not approved by security holders	-	-	-
Total	1,218,088	$16.86	1,149,910

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 750,000 shares has been authorized for issuance under the plan, as amended. As of March 31, 2002, 590,407 shares had been issued pursuant to the plan. Summarized plan information is as follows:

	2000	2001	2002
Employee contributions	$588,000	$687,000	$788,000
Shares acquired	52,200	45,108	36,951
Average purchase price	$11.26	$15.23	$21.32

Note G - Treasury Stock

The Company's Board of Directors has approved a plan to repurchase up to 5,100,000 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, 2000, 2001 and 2002 are as follows:

	2000	2001	2002	Cumulative
Shares repurchased	879,090	711,900	557,870	4,769,780
Cost	$12,966,000	$13,947,000	$15,237,000	$69,140,000
Average price	$14.75	$19.59	$27.31	$14.50

The repurchased shares were recorded as treasury stock, at cost, and are 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 non cancelable operating leases. Future minimum rental commitments under operating leases at March 31, 2002 are $7,134,000 in fiscal 2003, $6,273,000 in fiscal 2004, $5,189,000 in fiscal 2005, $4,070,000 in fiscal 2006, $2,715,000 in fiscal 2007, and $992,000 thereafter. Total rental expense of $7,100,000, $8,685,000, and $9,926,000 was charged to operations for the years ended March 31, 2000, 2001, and 2002, 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. Company contributions are made annually primarily at the discretion of the Company's Board of Directors. Contributions of $199,000, $224,000, and $247,000, were charged to operations for the years ended March 31, 2000, 2001 and 2002, respectively.

Note J - Shareholder Rights Plan

On May 16, 2002, the Company acquired AnciCare, PPO, Inc., a Florida-based national provider of diagnostic imaging services. The down payment for the acquisition was paid from the Company's existing cash on hand. If the results of the Ancicare operations attain certain levels, the Company will pay an additional amount for the purchase which is expected to be funded from future earnings of the Company.

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. In April, 2002, the Board of Directors of the Company approved an amendment to the Company's existing stockholder rights agreement to extend the expiration date of the rights to February 10, 2012, increase the initial exercise price of each right to $118. The Rights 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, 2001 and 2002:

Fiscal Year Ended March 31, 2001:
	Revenues	GrossMargin	Net Income	Net income per basic common share	Net income per diluted common share
First Quarter	$50,557,000	$9,328,000	$3,227,000	$.28	$.27
Second Quarter	51,658,000	9,347,000	3,272,000	.29	.28
Third Quarter	52,241,000	9,059,000	3,328,000	.29	.29
Fourth Quarter	55,098,000	9,810,000	3,395,000	.30	.29
Fiscal Year Ended March 31, 2002:
First Quarter	$58,001,000	$10,364,000	$3,593,000	$.32	$.31
Second Quarter	58,411,000	10,482,000	3,640,000	.33	.32
Third Quarter	58,724,000	10,701,000	3,755,000	.34	.33
Fourth Quarter	60,776,000	11,140,000	3,833,000	.35	.34