10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2011

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 0-19291

CORVEL CORPORATION

(Exact name of registrant as specified in its charter)

Delaware	33-0282651
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)
2010 Main Street, Suite 600 Irvine, CA	92614
(Address of principal executive office)	(zip code)

(949) 851-1473

Registrant’s telephone number, including area code:

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  þ    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (check one)

Large accelerated filer  ¨ Accelerated filer  þ Non-accelerated filer  ¨ Smaller Reporting Company  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  þ

The number of shares outstanding of the registrant’s Common Stock, $0.0001 par value per share, as of November 1, 2011 was 11,433,492.

CORVEL CORPORATION

FORM 10-Q

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION
		Page
Item 1.	Financial Statements
	Consolidated Balance Sheets — March 31, 2011 and September 30, 2011 (unaudited)		3
	Consolidated Income Statements (unaudited) — Three months ended September 30, 2010 and 2011		4
	Consolidated Income Statements (unaudited) — Six months ended September 30, 2010 and 2011		5
	Consolidated Statements of Cash Flows (unaudited) — Six months ended September 30, 2010 and 2011		6
	Notes to Consolidated Financial Statements (unaudited) — September 30, 2011		7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		21
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		34
Item 4.	Controls and Procedures		34
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings		35
Item 1A.	Risk Factors		36
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		44
Item 3.	Defaults Upon Senior Securities		44
Item 4.	(Removed and Reserved)		44
Item 5.	Other Information		44
Item 6.	Exhibits		44
	Signatures		45

Part I—Financial Information

Item 1. Financial Statements

Page 2

CORVEL CORPORATION

CONSOLIDATED BALANCE SHEETS

	March 31, 2011			September 30, 2011 (Unaudited)
Assets
Current Assets
Cash and cash equivalents (Note A)	$	12,269,000		$	8,134,000
Customer deposits		5,279,000			4,846,000
Accounts receivable, net		48,964,000			50,826,000
Prepaid taxes and expenses		6,417,000			6,608,000
Deferred income taxes		9,298,000			9,759,000
Total current assets		82,227,000			80,173,000
Property and equipment, net		38,500,000			43,351,000
Goodwill		36,769,000			36,769,000
Other intangibles, net (Note F)		6,729,000			6,433,000
TOTAL ASSETS	$	164,225,000		$	166,726,000
Liabilities and Stockholders’ Equity
Current Liabilities
Accounts and taxes payable	$	14,590,000		$	17,956,000
Accrued liabilities		40,248,000			30,325,000
Total current liabilities		54,838,000			48,281,000
Deferred income taxes		9,748,000			9,748,000
Commitments and contingencies (Note G and H)
Stockholders’ Equity
Common stock, $.0001 par value: 60,000,000 shares authorized at March 31, 2011 and 120,000,000 shares authorized at September 30, 2011; 26,122,084 shares issued (11,630,921 shares outstanding, net of Treasury shares) and 26,174,546 shares issued (11,465,181 shares outstanding, net of Treasury shares) at March 31, 2011 and September 30, 2011, respectively		3,000			3,000
Paid-in capital		100,073,000			103,057,000
Treasury Stock (14,491,163 shares at March 31, 2011 and
14,709,365 shares at September 30, 2011)		(248,931,000	)		(258,936,000	)
Retained earnings		248,494,000			264,573,000
Total stockholders’ equity		99,639,000			108,697,000
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	164,225,000		$	166,726,000

See accompanying notes to consolidated financial statements.

Page 3

CORVEL CORPORATION

CONSOLIDATED INCOME STATEMENTS — UNAUDITED

	Three Months Ended September 30,
	2010		2011
REVENUES	$	93,392,000	$	104,552,000
Cost of revenues		70,153,000		78,940,000
Gross profit		23,239,000		25,612,000
General and administrative expenses		14,171,000		12,592,000
Income before income tax provision		9,068,000		13,020,000
Income tax provision		1,535,000		5,139,000
NET INCOME	$	7,533,000	$	7,881,000
Net income per common and common equivalent share
Basic	$	0.64	$	0.68
Diluted	$	0.62	$	0.68
W eighted average common and common equivalent
Basic		11,861,000		11,526,000
Diluted		12,104,000		11,672,000

See accompanying notes to consolidated financial statements.

Page 4

CORVEL CORPORATION

CONSOLIDATED INCOME STATEMENTS — UNAUDITED

	Six Months Ended September 30,
	2010		2011
REVENUES	$	184,895,000	$	206,860,000
Cost of revenues		137,853,000		155,704,000
Gross profit		47,042,000		51,156,000
General and administrative expenses		25,657,000		24,886,000
Income before income tax provision		21,385,000		26,270,000
Income tax provision		6,092,000		10,191,000
NET INCOME	$	15,293,000	$	16,079,000
Net income per common and common equivalent share
Basic	$	1.28	$	1.39
Diluted	$	1.26	$	1.37
Weighted average common and common equivalent
Basic		11,909,000		11,572,000
Diluted		12,145,000		11,729,000

See accompanying notes to consolidated financial statements.

Page 5

CORVEL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS — UNAUDITED

	Six Months Ended September 30,
	2010			2011
Cash flows from Operating Activities
NET INCOME	$	15,293,000		$	16,079,000
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		5,947,000			6,987,000
Loss on disposal of assets		111,000			116,000
Stock compensation expense		1,264,000			1,329,000
Write-off of uncollectible accounts		1,087,000			1,305,000
Changes in operating assets and liabilities
Accounts receivable		(1,459,000	)		(3,167,000	)
Customer deposits		(609,000	)		433,000
Prepaid taxes and expenses		2,844,000			(191,000	)
Other assets		19,000			0
Accounts and taxes payable		(974,000	)		3,366,000
Accrued liabilities		1,163,000			(9,923,000	)
Deferred income tax		(810,000	)		(461,000	)
Net cash provided by operating activities		23,876,000			15,873,000
Cash Flows from Investing Activities
Purchase of property and equipment		(9,032,000	)		(11,658,000	)
Net cash (used in) investing activities		(9,032,000	)		(11,658,000	)
Cash Flows from Financing Activities
Purchase of treasury stock		(11,778,000	)		(10,005,000	)
Tax effect of stock option exercises		1,027,000			973,000
Exercise of common stock options		1,952,000			525,000
Exercise of employee stock purchase options		160,000			157,000
Net cash (used in) financing activities		(8,639,000	)		(8,350,000	)
Increase in cash and cash equivalents		6,205,000			(4,135,000	)
Cash and cash equivalents at beginning of period		10,242,000			12,269,000
Cash and cash equivalents at end of period	$	16,447,000		$	8,134,000
Supplemental Cash Flow Information:
Income taxes paid	$	6,165,000		$	7,288,000
Purchase of software license under finance agreement	$	1,700,000			861,000

See accompanying notes to consolidated financial statements.

Page 6

CORVEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2011

Note A — Basis of Presentation and Summary of Significant Accounting Policies

The unaudited financial statements herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. The accompanying interim financial statements have been prepared under the presumption that users of the interim financial information have either read or have access to the audited financial statements for the latest fiscal year ended March 31, 2011. Accordingly, footnote disclosures which would substantially duplicate the disclosures contained in the March 31, 2011 audited financial statements have been omitted from these interim financial statements.

In accordance with ASU 2010-09, the Company evaluated all subsequent events or transactions. During the period subsequent to September 30, 2011, the Company repurchased 45,668 shares for $2.20 million or $48.15 average price per share. These shares were repurchased under the Company’s ongoing share repurchase program described in Note C.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for the three and six months ended September 30, 2011 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2012. For further information, refer to the consolidated financial statements and footnotes for the fiscal year ended March 31, 2011 included in the Company’s Annual Report on Form 10-K.

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 compliance 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. Significant estimates include the values assigned to intangible assets, capitalized software development, the allowance for doubtful accounts, accrual for income taxes, purchase price allocation for acquisitions, accrual for self-insurance reserves, share-based payments related to performance based awards, loss contingencies, estimated claims for claims administration revenue recognition, and estimates used in stock option valuations.

Recent Accounting Pronouncements: In September 2011, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance allowing entities testing goodwill for impairment to perform a qualitative assessment to determine whether further impairment testing is necessary. If entities determine, on the basis of qualitative factors, that it is more likely than not that a reporting unit’s fair value is greater than the carrying amount, a quantitative calculation may not be needed. This update is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Adoption of the standard is not expected to have a material impact on our financial position, results of operations, or cash flows.

Cash and Cash Equivalents: Cash and cash equivalents consist of short-term highly-liquid investment-grade interest-bearing securities with maturities of 90 days or less when purchased.

Page 7

CORVEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2011

Note A — Basis of Presentation and Summary of Significant Accounting Policies (continued)

Fair Value of Financial Instruments: The Company applies ASC 820, “Fair Value Measurements and Disclosures” with respect to fair value measurements of (a) nonfinancial assets and liabilities that are recognized or disclosed at fair value in the Company’s Consolidated Financial Statements on a recurring basis (at least annually) and (b) all financial assets and liabilities. ASC 820 prioritizes the inputs used in measuring fair value into the following hierarchy:

Level 1 Quoted market prices in active markets for identical assets or liabilities;

Level 2 Observable inputs other than those included in Level 1 (for example, quoted prices for similar assets in active markets or quoted prices for identical assets in inactive markets); and

Level 3 Unobservable inputs reflecting management’s own assumptions about the inputs used in estimating the value of the asset.

The carrying amount of the Company’s financial instruments (i.e. cash, accounts receivable, accounts payable, etc.) are all Level 1 and approximate their fair values at March 31, 2011 and September 30, 2011. The Company has no Level 2 or Level 3 assets.

Goodwill: The Company accounts for its business combinations in accordance with FASB ASC 805-10 through ASC 805-50 Business Combinations which requires that the purchase method of accounting be applied to all business combinations and addresses the criteria for initial recognition of intangible assets and goodwill. In accordance with FASB ASC 350-10 through ASC 350-30, goodwill and other intangible assets with indefinite lives are not amortized but are tested for impairment annually, or more frequently if circumstances indicate the possibility of impairment. If the carrying value of goodwill or an intangible asset exceeds its fair value, an impairment loss shall be recognized. The Company’s goodwill impairment test is conducted company-wide and the fair value is compared to its carrying value. The measurement of fair value is based on an evaluation of market capitalization and is further tested using a multiple of earnings approach. For all periods presented, no material impairment existed and, accordingly, no loss was recognized.

Revenue Recognition: The Company recognizes revenue when there is persuasive evidence of an arrangement, the services have been provided to the customer, the sales price is fixed or determinable, and collectability is reasonably assured. For the Company’s services, as the Company’s professional staff performs work, they are contractually permitted to bill for fees earned in fraction of an hour increments worked or by units of production. The Company recognizes revenue as the time is worked or as units of production are completed, which is when the revenue is earned and realized. Labor costs are recognized as the costs are incurred. The Company derives the majority of its revenue from the sale of Network Solutions and Patient Management services. Network Solutions and Patient Management services may be sold individually or combined with any of the services the Company provides. When a sale combines multiple elements, the Company accounts for multiple element arrangements in accordance with the guidance included in ASC 605-25.

Page 8

CORVEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2011

Note A — Basis of Presentation and Summary of Significant Accounting Policies (continued)

In accordance with ASC 605-25, the Company allocates revenue for transactions or collaborations that include multiple elements to each unit of accounting based on its relative fair value, and recognizes revenue for each unit of accounting when the revenue recognition criteria have been met. The price charged when the element is sold separately generally determines fair value. When our customers purchase several products from CorVel, the pricing of the products sold is generally the same as if the product were sold on an individual basis. As a result, the fair value of each product sold in a multiple element arrangement is almost always determinable. The Company recognizes revenue for delivered elements when the delivered elements have standalone value and the Company has objective and reliable evidence of fair value for each undelivered element. If the fair value of any undelivered element included in a multiple element arrangement cannot be objectively determined, revenue is deferred until all elements are delivered and services have been performed, or until fair value can objectively be determined for any remaining undelivered elements. Based upon the nature of our products, bundled products are generally delivered in the same accounting period.

The FASB issued Accounting Standards Update No. 2009-13, Multiple Deliverable Revenue Arrangements — a consensus of FASB Emerging Issues Task Force (“ASU 2009-13”). ASU 2009-13 provides for less restrictive separation criteria that must be met for a deliverable to be considered a separate unit of accounting. Additionally, under this Standard, there is a hierarchy for determining the selling price of a unit of accounting and consideration must be allocated using a relative-selling price method. ASU 2009-13 was be effective for CorVel Corporation on April 1, 2011. We reviewed the requirements of ASU 2009-13 and determined the pronouncement had no material impact on our financial position or results of operations.

Accounts Receivable: The majority of the Company’s accounts receivable are due from companies in the property and casualty insurance industries, self-insured employers, and government entities. Accounts receivable are due within 30 days and are stated as amounts due from customers net of an allowance for doubtful accounts. Those accounts outstanding longer than the contractual payment terms are considered past due. The Company determines its allowance by considering a number of factors, including the length of time trade accounts receivable are past due, the Company’s previous loss history, the customer’s current ability to pay its obligation to the Company and the condition of the general economy and the industry as a whole. No one customer accounted for 10% or more of accounts receivable at either March 31, 2011 or September 30, 2011. No one customer accounted for 10% or more of revenue during either of the three or six month periods ended September 30, 2010 or 2011.

Property and Equipment: Additions to property and equipment are recorded at cost. Depreciation and amortization are provided using the straight-line method over the estimated useful lives of the related assets, which range from one to seven years. The Company accounts for internally developed software costs in accordance with FASB ASC 350-40, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use, which allows for the capitalization of software developed for internal use. 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.

Page 9

CORVEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2011

Note A — Basis of Presentation and Summary of Significant Accounting Policies (continued)

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. The balance of the unrecognized tax benefits as of March 31, 2011 and September 30, 2011 was $1,608,000 and $1,529,000, respectively.

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 decreased in the September 2011 quarter compared to the same quarter of the prior year primarily due to repurchase of shares under the Company’s share repurchase program. See also Note D.

Note B — Stock Based Compensation and Stock Options

Under the Company’s Restated Omnibus Incentive Plan (Formerly The Restated 1988 Executive Stock Option Plan) (“the Plan”) as in effect at September 30, 2011, options for up to 9,682,500 shares of the Company’s common stock may be granted to key employees, non-employee directors and consultants at exercise prices not less than the fair market value of the stock at the date of grant. Options granted under the Plan are non-statutory stock options and generally vest 25% one year from date of grant and the remaining 75% vesting ratably each month for the next 36 months. The options granted to employees and the board of directors expire at the end of five years and ten years from date of grant, respectively.

The Company records compensation expense for employee stock options based on the estimated fair value of the options on the date of grant using the Black-Scholes option-pricing model with the assumptions included in the table below. The Company uses historical data among other factors to estimate the expected volatility, the expected option life, and the expected forfeiture rate. The risk-free rate is based on the interest rate paid on a U.S. Treasury issue with a term similar to the estimated life of the option. Based upon the historical experience of options cancellations, the Company has estimated an annualized forfeiture rate of 9.27% and 9.36% for the three months ended September 30, 2010 and 2011, respectively. Forfeiture rates will be adjusted over the requisite service period when actual forfeitures differ, or are expected to differ, from the estimate. The following assumptions were used to estimate the fair value of options granted during the three months ended September 30, 2010 and 2011 using the Black-Scholes option-pricing model:

Page 10

CORVEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2011

Note B — Stock Options and Stock-Based Compensation (continued)

	Three Months Ended September  30,
	2010			2011
Risk-free interest rate		2.15	%		1.13	%
Expected volatility		46	%		47	%
Expected dividend yield		0.00	%		0.00	%
Expected forfeiture rate		9.27	%		9.36	%
Expected weighted average life of option in years		4.7 years			4.7 years

All options granted in the six months ended September 30, 2010 and 2011 were granted at fair market value and are non-statutory stock options.

In May 2006, the Company’s Board of Directors granted performance-based stock options for 149,175 shares of common stock at fair market value at the date of grant, which would only vest if the Company attained certain earnings per share targets, as established by the Company’s Board of Directors, for calendar years 2008, 2009, and 2010. These options were granted with an exercise price of $15.76 per share, which was the fair market value at the date of grant, and have a valuation of $6.75 per share. The Company did not attain the targets for calendar years 2008 and 2009. The Company attained the earnings per share target for calendar year 2010 which allowed for options for 68,025 shares to vest. The Company recognized $413,000 in stock compensation expense in fiscal 2011, and $459,000, cumulatively, for these options. No further stock options will vest under this grant and there will be no further recognition of stock compensation expense.

In February 2008, the Company’s Board of Directors granted performance-based stock options for 42,000 shares of common stock at fair market value at the date of grant, which will only vest if the Company attains certain revenue targets for all services sold to claims administration clients and out-of-network bill review revenues, as established by the Company’s Board of Directors, for calendar years 2009, 2010, and 2011. The targets for the various options varied by the regions managed by these optionees with each region having a different target. These options were granted with an exercise price of $25.10 per share, which was the fair market value at the date of grant, and have a valuation of $9.81 per share. Currently, management has determined that optionees with 12,000 options attained the revenue targets for calendar year 2009 and 2010, and, accordingly, the Company has recognized $33,000 during fiscal 2011, $11,000 during the quarter ended September 30, 2011, $22,000 during the six months ended September 30, 2011, and $105,000, cumulatively, since the date of the option grant. Currently, management has determined that it is not probable that the revenue targets for the remaining optionees will be attained and, accordingly, the Company has recognized no stock compensation expense for those options.

In February 2009, the Company’s Board of Directors granted performance-based stock options for 100,000 shares of common stock at fair market value at the date of grant, which will only vest if the Company attains certain earnings per share targets, as established by the Company’s Board of Directors, for calendar years 2009, 2010, and 2011. Net of cancelations due to employee terminations, options for 95,000 shares remained under these performance-based stock options as of September 30, 2011. These options were granted with an exercise price of $19.79 per share, which was the fair market value at the date of grant, and have a valuation of $8.21 per share. The Company attained these targets for calendar 2009 and 2010, expects to attain the target for calendar year 2011, and, accordingly, the Company recognized stock compensation expense of $221,000 during fiscal year 2011, $78,000 during the quarter ended September 30, 2011, $156,000 for the six months ended September 30, 2011, and $702,000, cumulatively, since the date of the option grants.

Page 11

CORVEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2011

Note B — Stock Options and Stock-Based Compensation (continued)

In February 2009, the Company’s Board of Directors granted performance-based stock options for 10,000 shares of common stock at fair market value at the date of grant, which will only vest if the Company attains certain revenue targets for all services sold to claims administration clients and out-of-network bill review revenues, as established by the Company’s Board of Directors, for calendar years 2009, 2010, and 2011. These options were granted with an exercise price of $20.37 per share, which was the fair market value at the date of grant, and have a valuation of $8.45 per share. The Company did not achieve the revenue target for calendar year 2009 or 2010. Currently, management has determined that it is not probable that the Company will attain the revenue targets for calendar year 2011, and, accordingly, the Company has recognized no stock compensation expense for this stock option grant during fiscal 2011 or the three or six months ended September 30, 2011.

In November 2009, the Company’s Board of Directors granted performance-based stock options for 110,000 shares of common stock at fair market value at the date of grant, which will only vest if the Company attains certain earnings per share targets, as established by the Company’s Board of Directors, for calendar years 2010, 2011, and 2012. These options were granted with an exercise price of $28.92 per share, which was the fair market value at the date of grant, and have a valuation of $12.57 per share. The Company attained the earnings per share target in calendar year 2010, and currently, management has determined that it is probable that the Company will attain the earnings per share targets for calendar year 2011. Accordingly, the Company recognized $337,000 of stock compensation expense for this stock option grant during fiscal 2011, $104,000 for the three months ended September 30, 2011, $208,000 for the six months ended September 30, 2011, and $726,000, cumulatively.

In December 2010, the Company’s Board of Directors granted performance-based stock options for 100,000 shares of common stock at fair market value at the date of grant, which will only vest if the Company attains certain earnings per share targets, as established by the Company’s Board of Directors, for calendar years 2011, 2012, and 2013. These options were granted with an exercise price of $46.14 per share, which was the fair market value at the date of grant, and have a valuation of $18.72 per share. Management has determined that it is probable that the Company will attain the earnings per share targets for calendar year 2011. Accordingly, the Company has recognized $140,000 of stock compensation expense for this stock option grant during fiscal 2011, $140,000 during the three months ended September 30, 2011, $280,000 for the six months ended September 30, 2011 and $421,000, cumulatively.

Page 12

CORVEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2011

Note B — Stock Based Compensation and Stock Options (continued)

The table below shows the amounts recognized in the financial statements for stock compensation expense for time based options and performance based options the three and six months ended September 30, 2010 and 2011, respectively. Included in the three months and six months ended September 30, 2011 stock compensation expense is $334,000 and $668,000, respectively, for the expense related to the performance based options.

	Three Months Ended
	September 30, 2010			September 30, 2011
Cost of revenues	$	147,000		$	125,000
General and administrative		526,000			546,000
Total cost of stock-based compensation included in		673,000			671,000
income before income tax provision
Amount of income tax benefit recognized		(256,000	)		(262,000	)
Amount charged against net income	$	417,000		$	409,000
Effect on diluted net income per share	$	(0.03	)	$	(0.04	)

	Six Months Ended
	September 30, 2010			September 30, 2011
Cost of revenues	$	281,000		$	250,000
General and administrative		983,000			1,079,000
Total cost of stock-based compensation included in		1,264,000			1,329,000
income before income tax provision
Amount of income tax benefit recognized		(474,000	)		(520,000	)
Amount charged against income	$	790,000		$	809,000
Effect on diluted income per share	$	(0.07	)	$	(0.07	)

Page 13

CORVEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2011

Note B — Stock Based Compensation and Stock Options (continued)

Summarized information for all stock options for the three months and six months ended September 30, 2010 and 2011 follows:

	Three Months Ended September 30, 2010					Three Months Ended September 30, 2011
	Shares			Average Price		Shares			Average Price
Options outstanding, beginning		1,079,022		$	23.35		797,377		$	29.87
Options granted		45,000			39.06		29,550			43.73
Options exercised		(95,317	)		17.94		(26,429	)		23.51
Options cancelled		(1,266	)		16.81		(1,625	)		25.31
Options outstanding, ending		1,027,439		$	24.55		798,873		$	30.62

	Six Months Ended September 30, 2010					Six Months Ended September 30, 2011
	Shares			Average Price		Shares			Average Price
Options outstanding, beginning		1,065,403		$	22.57		813,622		$	29.26
Options granted		93,000			37.76		45,225			45.75
Options exercised		(129,538	)		17.77		(54,973	)		23.17
Options cancelled		(1,426	)		20.85		(5,001	)		28.20
Options outstanding, ending		1,027,439		$	24.55		798,873		$	30.62

The following table summarizes the status of stock options outstanding and exercisable at September 30, 2011:

Page 14

CORVEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2011

Note B — Stock Based Compensation and Stock Options (continued)

Range of Exercise Price	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
$15.55 to $23.55		200,964		2.65	$	19.39		152,052	$	19.17
$24.75 to $28.92		254,669		2.80	$	27.04		140,437	$	26.62
$28.92 to $43.73		212,415		4.11	$	35.69		92,553	$	33.06
$46.00 to $49.56		130,825		4.20	$	46.59		1,175	$	47.70
Total		798,873		3.34	$	30.62		386,217	$	25.29

A summary of the status for all outstanding options at September 30, 2011, and changes during the three months then ended, is presented in the table below:

	Number of Options			Weighted Average Exercise Per Share		Weighted Average Remaining Contractual Life (Years)		Aggregate Intrinsic Value as of September 30, 2011
Options outstanding at July 1, 2011		797,377		$	29.89
Granted		29,550			43.73
Exercised		(26,429	)		23.51
Cancelled – forfeited		(1,100	)		28.75
Cancelled – expired		(525	)		18.09
Ending outstanding		798,873		$	30.62		3.34	$	10,062,545
Ending vested and expected to vest		735,700		$	29.91		3.27	$	9,706,495
Ending exercisable at September 30, 2011		386,217		$	25.29		2.72	$	6,651,753

The weighted-average grant-date fair value of options granted during the three months ended September 30, 2010 and 2011, was $16.28 and $17.59, respectively.

Page 15

CORVEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2011

Note C — Treasury Stock and Subsequent Event

The Company’s Board of Directors initially approved the commencement of a share repurchase program in the fall of 1996. In May 2010, the Board approved an 850,000 share expansion of the repurchase program to 15,000,000 shares over the life of the share repurchase program. Since the commencement of the share repurchase program, the Company has spent $259 million to repurchase 14,709,365 shares of its common stock, equal to 56% of the outstanding common stock had there been no repurchases. The average price of these repurchases is $17.60 per share. These purchases have been funded primarily from the net earnings of the Company, along with the proceeds from the exercise of common stock options. During the three and six months ended September 30, 2011, the Company repurchased 140,672 shares for $6.3 million, and 218,202 shares for $10.0 million, respectively. The Company had 11,465,181 shares of common stock outstanding as of September 30, 2011, net of the 14,709,365 shares in treasury. Subsequent to the end of the quarter, through October 25, 2011, the Company repurchased 45,668 shares of common stock for $2.20 million or $48.15 average price per share.

Note D — Weighted Average Shares and Net Income Per Share

Weighted average basic common and common equivalent shares decreased from 11,861,000 for the quarter ended September 30, 2010 to 11,526,000 for the quarter ended September 30, 2011. Weighted average diluted common and common equivalent shares decreased from 12,104,000 for the quarter ended September 30, 2010 to 11,672,000 for the quarter ended September 30, 2011. The net decrease in both of these weighted share calculations is due to the repurchase of common stock as noted above, offset by an increase in shares outstanding due to the exercise of stock options under the Company’s employee stock option plan.

Page 16

CORVEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2011

Note D — Weighted Average Shares and Net Income Per Share (continued)

Net income per common and common equivalent shares was computed by dividing net income by the weighted average number of common and common stock equivalents outstanding during the quarter. The calculations of the basic and diluted weighted shares for the three months ended September 30, 2010 and 2011, are as follows:

	Three Months Ended September 30,
	2010		2011
Net Income	$	7,533,000	$	7,881,000
Basic:
Weighted average common shares outstanding		11,861,000		11,526,000
Net Income per share	$	0.64	$	0.68
Diluted:
Weighted average common shares outstanding		11,861,000		11,526,000
Treasury stock impact of stock options		243,000		146,000
Total common and common equivalent shares		12,104,000		11,672,000
Net Income per share	$	0.62	$	0.68

	Six Months Ended September 30,
	2010		2011
Net Income	$	15,293,000	$	16,079,000
Basic:
Weighted average common shares outstanding		11,909,000		11,572,000
Net Income per share	$	1.28	$	1.39
Diluted:
Weighted average common shares outstanding		11,909,000		11,572,000
Treasury stock impact of stock options		236,000		157,000
Total common and common equivalent shares		12,145,000		11,729,000
Net Income per share	$	1.26	$	1.37

Page 17

CORVEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2011

Note E — Shareholder Rights Plan

During fiscal 1997, the Company’s Board of Directors approved the adoption of a Shareholder Rights Plan. The Shareholder Rights Plan provides for a dividend distribution to CorVel stockholders of one preferred stock purchase right for each outstanding share of CorVel’s common stock under certain circumstances. In November 2008, the Company’s Board of Directors approved an amendment to the Shareholder Rights Plan to extend the expiration date of the rights to February 10, 2022, and set the exercise price of each right at $118.

The rights are designed to assure that all shareholders 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 $118 per right, subject to subsequent adjustment. The rights trade with the Company’s common stock and will not be exercisable until the occurrence of certain takeover-related events.

Generally, the Shareholder Rights Plan provides that if a person or group acquires 15% or more of the Company’s common stock without the approval of the Board, subject to certain exceptions, the holders of the rights, other than the acquiring person or group, would, under certain circumstances, have the right to purchase additional shares of the Company’s common stock having a market value equal to two times the then-current exercise price of the right.

In addition, if the Company is thereafter merged into another entity, or if 50% or more of the Company’s consolidated assets or earning power are sold, then the right will entitle its holder to buy common shares of the acquiring entity having a market value equal to two times the then-current exercise price of the right. The Company’s Board of Directors may exchange or redeem the rights under certain conditions.

Note F — Other Intangible Assets

Other intangible assets consist of the following at September 30, 2011:

Item	Life		Cost		Six Months Ended September 30, 2011 Amortization Expense		Accumulated Amortization at September 30, 2011		Cost, Net of Accumulated Amortization at September 30, 2011
Covenants Not to Compete		5 Years	$	775,000	$	78,000	$	592,000	$	183,000
Customer Relationships		18-20 Years		7,922,000		212,000		1,820,000		6,102,000
TPA Licenses		15 Years		204,000		6,000		56,000		148,000
Total			$	8,901,000	$	296,000	$	2,468,000	$	6,433,000

Note G — Line of Credit

In September 2011, the Company renewed a credit agreement that had been in place throughout fiscal 2011 and the six months ended September 30, 2011. The line is with a financial institution to provide a revolving credit facility with borrowing capacity of up to $10 million. Borrowings under this agreement, as amended, bear interest, at

Page 18

CORVEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2011

Note G — Line of Credit (continued)

the Company’s option, at a fixed LIBOR-based rate plus 1.50% or at a fluctuating rate determined by the financial institution to be 1.50% above the daily one-month LIBOR rate. The loan covenants require the Company to maintain the current assets to liabilities ratio of at least 1.25:1, debt to tangible net worth not greater than 1.25:1 and have positive net income. There were no outstanding revolving loans at any time during fiscal 2011 or the six months ended September 30, 2011, or as of the date hereof, but letters of credit in the aggregate amount of $8.0 million have been issued separate from the line of credit and therefore do not reduce the amount of borrowings available under the revolving credit facility. The renewed credit agreement expires in September 2012.

Note H — Contingencies and Litigation

On March 25, 2011, George Raymond Williams, MD. (“Williams”), as plaintiff, individually and on behalf of those similarly situated, filed a First Amended and Restated Petition for Damages and Class Certification in the 27^th Judicial District Court, Parish of St. Landry, Louisiana, against CorVel Corporation (“CorVel”) and its insurance carriers, Homeland Insurance Company of New York and Executive Risk Specialty Insurance Company and several other unrelated parties. Williams alleges that CorVel violated Louisiana’s Any Willing Provider Act (the “AWPA”), which requires a payor accessing a preferred provider contract to give 30 days’ advance written notice or point of service notice in the form of a benefit card before the payor accesses the discounted rates in the contract to pay the provider for services rendered to an insured under that payor’s health benefit plan.

On March 31, 2011, CorVel entered into a Memorandum of Understanding with attorneys representing the plaintiffs and the class setting forth the terms of settlement of this class action lawsuit. The Memorandum of Understanding provides that subject to the execution of a mutually acceptable settlement agreement and final non-appealable approval of such settlement by the Louisiana state court, CorVel will pay $9 million to resolve claims for which CorVel recorded a $9 million pre-tax charge to earnings during the March 2011 quarter. In addition, CorVel will assign to the class certain rights it has to the proceeds of CorVel’s insurance policies relating to the claims asserted by the class. The class action arbitration filed with the American Arbitration Association against CorVel in December 2006 by Southwest Louisiana Hospital Association dba Lake Charles Memorial Hospital as previously disclosed by CorVel is encompassed within the settlement terms of the Memorandum of Understanding. Pursuant to the Memorandum of Understanding, the parties have also agreed to request that the appropriate courts stay all related proceedings in State and Federal Court, as well as the Louisiana Office of Workers Compensation and the arbitration proceeding before the American Arbitration Association in which the parties are named, until the settlement agreement is prepared, executed and receives final court approval. The settlement does not constitute an admission of liability.

On June 23, 2011 CorVel and class counsel executed a definitive settlement agreement. The settlement agreement contains the same terms and conditions as were set forth in the Memorandum of Understanding. Accordingly, CorVel made a $9 million cash payment into escrow on July 6, 2011. As set forth in the settlement agreement, certain contingencies such as preliminary court approval, resolutions of objections filed by class members challenging the fairness of the settlement, class members excluded from the settlement not exceeding a materiality threshold, and final court approval, must be satisfied before the settlement become final.

Page 19

CORVEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2011

Note H — Contingencies and Litigation (continued)

On June 23, 2011, the 27^th Judicial District Court for the Parish of St. Landry, Louisiana granted preliminary approval of settlement. Notice of the settlement is being given to Class Members. The Court has set a deadline of October 16, 2011 for parties to opt out of or object to the proposed settlement. The Court has set the hearing for final approval on November 4, 2011.

In exchange for the settlement payment by CorVel, class members will release CorVel and all of its affiliates and clients for any claims relating in any way to re-pricing, payment for, or reimbursement of a workers’ compensation bill, including but not limited to claims under the AWPA. Plaintiffs have also agreed to a notice procedure that CorVel may follow in the future to comply with the AWPA. As noted, the Memorandum of Understanding is contingent upon the execution of a mutually acceptable definitive settlement agreement. Under Louisiana law, once the parties have executed such a settlement agreement, they must apply to the court for approval of the settlement following a court-supervised process of notice to the class and an opportunity for the class to be heard about the fairness of the settlement or to be excluded from the settlement. CorVel expects to be able to arrive at such a definitive settlement agreement by the end of December 2011, but there can be no assurance that the parties will be able to reach a definitive settlement agreement within that timeframe or at all, that the court will approve the settlement or that a large number of class members will not opt out of the settlement. If a definitive settlement agreement is not reached or is not approved by the court, all related proceedings in State and Federal Court, as well as the Louisiana Office of Workers Compensation and the arbitration proceeding before the American Arbitration Association that have been stayed pending settlement will resume.

In February 2005, Kathleen Roche, D.C., as plaintiff, filed a putative class action in Circuit Court for the 20th Judicial District, St. Clair County, Illinois, against the Company. The case sought unspecified damages based on the Company’s alleged failure to direct patients to medical providers who were members of the CorVel CorCare PPO network and also alleged that the Company used biased and arbitrary computer software to review medical providers’ bills. On October 29, 2010, the Company entered into a settlement agreement providing for the payment of $2.1 million to class members and up to an additional $700,000 for attorneys’ fees and expenses, and as a result the Company accrued $2.8 million of estimated liability for this settlement agreement during the quarter ended September 30, 2010. Initial payments were sent to class members on July 18, 2011. The Company denies that its conduct was improper in any way and has denied all liability. In exchange for the settlement payment by the Company, class members consisting of Illinois medical providers (excluding hospitals) have released the Company and all of its affiliates for claims relating to any PPO or usual and customary reductions recommended by the Company on class members’ medical bills. On January 21, 2011, the Circuit Court gave final approval to the settlement and awarded class counsel $700,000 in attorneys’ fees and expenses and a $5,000 incentive award to Kathleen Roche, the class representative.

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

Page 20

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This report may include certain forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including (without limitation) statements with respect to anticipated future operating and financial performance, growth and acquisition opportunities and other similar forecasts and statements of expectation. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates” “may”, “will”, “would”, “could” and “should”, and variations of these words and similar expressions, are intended to identify these forward-looking statements. Forward-looking statements made by the Company and its management are based on estimates, projections, beliefs and assumptions of management at the time of such statements and are not guarantees of future performance.

The Company disclaims any obligations to update or revise any forward-looking statement based on the occurrence of future events, the receipt of new information or otherwise, except as required by law. Actual future performance, outcomes and results may differ materially from those expressed in forward-looking statements made by the Company and its management as a result of a number of risks, uncertainties and assumptions. Representative examples of these factors include (without limitation) general industry and economic conditions including a decreasing number of national claims due to decreasing number of injured workers; cost of capital and capital requirements; existing and possible litigation and legal liability in the course of operations; competition from other managed care companies; the ability to expand certain areas of the Company’s business; shifts in customer demands; the ability of the Company to produce market-competitive software; changes in operating expenses including employee wages, benefits and medical inflation; governmental and public policy changes; dependence on key personnel; and the continued availability of financing in the amounts and at the terms necessary to support the Company’s future business.

Page 21

Overview

CorVel Corporation is an independent nationwide provider of medical cost containment and managed care services designed to address the escalating medical costs of workers’ compensation and auto policies. The Company’s services are provided to insurance companies, TPA’s, and self-administered employers to assist them in managing the medical costs and monitoring the quality of care associated with healthcare claims.

Network Solutions Services

The Company’s network solutions services are designed to reduce the price paid by its customers for medical services rendered in workers’ compensation cases, auto policies and, to a lesser extent, group health policies. The network solutions offered by the Company include automated medical fee auditing, preferred provider services, retrospective utilization review, independent medical examinations, and inpatient bill review. Network solutions services also includes revenue from the Company’s directed care network, including imaging and physical therapy.

Patient Management Services

The Company offers a range of patient management services, which involve working on a one-on-one basis with injured employees and their various healthcare professionals, employers and insurance company adjusters. The services are designed to monitor the medical necessity and appropriateness of healthcare services provided to workers’ compensation and other healthcare claimants and to expedite their return to work. The Company offers these services on a stand-alone basis, or as an integrated component of its medical cost containment services.

Organizational Structure

The Company’s management is structured geographically with regional vice-presidents who report to the President of the Company. Each of these regional vice-presidents is responsible for all services provided by the Company in his or her particular region and for the operating results of the Company in multiple states. These regional vice presidents have area and district managers who are also responsible for all services provided by the Company in their given area and district.

Business Enterprise Segments

The Company operates in one reportable operating segment, managed care. The Company’s services are delivered to its customers through its local offices in each region and financial information for the Company’s operations follows this service delivery model. All regions provide the Company’s patient management and network solutions services. FASB ASC 280-10 establishes standards for the way that public business enterprises report information about operating segments in annual and interim consolidated financial statements. The Company’s internal financial reporting is segmented geographically, as discussed above, and managed on a geographic rather than service line basis, with virtually all of the Company’s operating revenue generated within the United States.

Under FASB ASC 280-10, two or more operating segments may be aggregated into a single operating segment for financial reporting purposes if aggregation is consistent with the objective and basic principles, if the segments have similar economic characteristics, and if the segments are similar in each of the following areas: 1) the nature of products and services; 2) the nature of the production processes; 3) the type or class of customer for their products and services; and 4) the methods used to distribute their products or provide their services. The Company believes each of its regions meet these criteria as each provides similar services and products to similar customers using similar methods of productions and similar methods to distribute the services and products.

Summary of Quarterly Results

The Company generated revenues of $104.6 million for the quarter ended September 30, 2011, an increase of $11.2 million, or 11.9%, compared to revenues of $93.4 million for the quarter ended September 30, 2010. The increase in revenues was partially due to an increase in patient management business from increased revenues of the Company’s TPA services. Network solutions revenue increased primarily due to an increase in the Company’s pharmacy and directed care revenues. As the Company has expanded the offer of its TPA services, it has found the directed care and TPA services to be synergistic as customers who buy one service can easily buy the other.

Page 22

The Company’s cost of revenues increased by $8.8 million, from $70.2 million in the September 2010 quarter to $78.9 million in the September 2011 quarter, an increase of 12.5%. This increase was primarily due to the 11.9% increase in revenues noted above. More of the Company’s growth came from an increase in the revenues from TPA services, pharmacy and direct care services which generate a lower gross margin than the Company’s other services which caused a greater increase in cost of revenues as compared to revenues.

The Company’s general and administrative expense decreased by $1.6 million, from $14.2 million in the September 2010 quarter to $12.6 million in the September 2011 quarter, a decrease of 11.1%. This decrease is primarily due to the recognition of a $2.8 million legal settlement during the September 2010 quarter as discussed in Note H. There was no such similar settlement in the September 2011 quarter.

The Company’s income tax expense increased by $3.6 million, from $1.5 million in the September 2010 quarter to $5.1 million in the September 2011 quarter. This increase in income tax expense was due to an increase in income before income taxes along with an increase in the income tax rate. In the quarter ended September 30, 2010, the Company recognized a lower income tax rate due to the resolution of certain tax issues.

Weighted diluted shares decreased from 12.1 million shares in the September 2010 quarter to 11.7 million shares in the September 2011 quarter, a decrease of 0.4 million shares, or 3.6%. This decrease was due primarily to the repurchase of 775,405 shares in the four quarters ended September 2011. The decrease in shares resulting from the shares repurchased was offset by the exercise of stock options during the last four quarters.

Diluted earnings per share increased from $0.62 in the September 2010 quarter to $0.68 in the September 2011 quarter, an increase of $0.06 per share, or 9.7%. The increase in diluted earnings per share was due to the increase in income before income tax expense along with the reduction in the number of shares outstanding due to the shares repurchased.

Results of Operations for the three months ended September 30, 2010 and 2011

The Company derives its revenues from providing patient management and network solutions services to payors of workers’ compensation benefits, auto insurance claims and health insurance benefits. Patient management services include claims management, case management, 24/7 nurse triage, utilization management, vocational rehabilitation and life care planning. Network solutions services include medical bill review, PPO management, enhanced bill review, provider reimbursement, professional review, pharmacy services, directed care services, Medicare solutions and clearinghouse services. The percentage of total revenues attributable to patient management and network solutions services for the quarters ended September 30, 2010 and September 30, 2011 are as follows:

	September 30, 2010			September 30, 2011
Patient management services		47.4	%		47.3	%
Network solutions services		52.6	%		52.7	%

Page 23

The following table sets forth, for the periods indicated, the dollar amounts, dollar and percent changes, share changes, and the percentage of revenues represented by certain items reflected in the Company’s consolidated income statements for the three months ended September 30, 2010 and September 30, 2011. The Company’s past operating results are not necessarily indicative of future operating results.

Page 24

	Three Months Ended September 30, 2010			Three Months Ended September 30, 2011			Change			Percentage Change
Revenue	$	93,392,000		$	104,552,000		$	11,160,000			11.9	%
Cost of revenues		70,153,000			78,940,000			8,787,000			12.5	%
Gross profit		23,239,000			25,612,000			2,373,000			10.2	%
Gross profit as percentage of revenue		24.9	%		24.5	%
General and administrative		14,171,000			12,592,000			(1,579,000	)		(11.1	%)
General and administrative as percentage of revenue		15.2	%		12.0	%
Income before income tax provision		9,068,000			13,020,000			3,952,000			43.6	%
Income before income tax provision as percentage of revenue		9.7	%		12.5	%
Income tax provision		1,535,000			5,139,000			3,604,000			234.8	%
Net income	$	7,533,000		$	7,881,000		$	348,000			4.6	%
Weighted Shares
Basic		11,861,000			11,526,000			(335,000	)		(2.8	%)
Diluted		12,104,000			11,672,000			(432,000	)		(3.6	%)
Earnings Per Share
Basic	$	0.64		$	0.68		$	0.04			6.3	%
Diluted	$	0.62		$	0.68		$	0.06			9.7	%

Revenues

Change in revenue from the quarter ended September 2010 to the quarter ended September 2011

Revenues increased from $93.4 million for the three months ended September 30, 2010 to $104.6 million for the three months ended September 30, 2011, an increase of $11.1 million, or 11.9%. The increase was partially due to an increase in the Company’s patient management revenues by $5.4 million or 12.2% from $44.1 million in the September 2010 quarter to $49.5 million in the September 2011 quarter. This increase was primarily due to increase in the number of customers and customer utilization of the Company’s TPA services. This growth was complemented by an increase in network solutions revenue by $5.8 million, or 11.7%, from $49.3 million in the September 2010 quarter to $55.1 million in the September 2011 quarter. This increase was primarily due to an increase in revenues from the Company’s pharmacy and directed care services.

The Company believes that referral volume in patient management services and bill review volume in network solutions services may decrease or reflect nominal growth until there is growth in the number of work related injuries and workers’ compensation related claims.

Cost of Revenue

The Company’s cost of revenues consist of direct expenses, costs directly attributable to the generation of revenue, and field indirect costs which are incurred in the field offices of the Company. Direct costs are primarily case manager salaries, bill review analysts, related payroll taxes and fringe benefits, and costs for independent medical examination (IME) and diagnostic imaging providers. Most of the Company’s revenues are generated in offices which provide both patient management services and network solutions services. The largest of the field indirect costs are manager salaries and bonus, account executive base pay and commissions, administrative and clerical support, field systems personnel, prescription drug costs, PPO network developers, related payroll taxes and fringe benefits, office rent, and telephone expense. Approximately 39% of the costs incurred in the field are costs which support both the patient management services and network solutions operations of the Company’s field offices, such as district managers, account executives, rent, and telephone.

Page 25

Change in cost of revenue from the quarter ended September 30, 2010 to the quarter ended September 30, 2011

The Company’s costs of revenue increased from $70.2 million in the quarter ended September 30, 2010 to $78.9 million in the quarter ended September 30, 2011, an increase of $8.8 million, or 12.5%, roughly approximating the 12% increase in revenues for the same periods. Direct salaries increased from $18.4 million for the quarter ended September 30, 2010, to $20.7 million for the quarter ended September 30, 2011. Direct pharmacy costs increased from $8.2 million for the quarter ended September 30, 2010 to $10.9 million for the quarter ended September 30, 2011. This increase in pharmacy costs is due to the increase in revenues noted above.

General and Administrative Expense

For the quarter ended September 30, 2011, general and administrative expense consisted of approximately 55% of corporate systems costs which include corporate systems support, implementation and training, amortization of software development costs, depreciation of the hardware costs in the Company’s national systems, the Company’s national wide area network and other systems related costs. The remaining 45% of the general and administrative expense consisted of national marketing, national sales support, corporate legal, corporate insurance, human resources, accounting, external audit, product management, new business development and other general corporate matters.

Change in general and administrative expense from the quarter ended September 30, 2010 to the quarter ended September 30, 2011

General and administrative expense decreased from $14.2 million in the quarter ended September 30, 2010 to $12.6 million in the quarter ended September 30, 2011, a decrease of $1.6 million, or 11.1%. This decrease is due to the $2.8 million of expense recorded by the Company in the quarter ended September 30, 2010 for litigation as discussed in Note H. Excluding this charge to settle the litigation, general and administrative costs would have increased from $11.4 million in the quarter ended September 30, 2010 to $12.6 million for the quarter ended September 30, 2011. The largest portion of this increase in general and administrative costs is due to the increase in systems costs by $6.0 million to $6.6 million. This increase in costs is primarily due to efforts to improve the Company’s proprietary claims systems and an increase in ongoing support and maintenance. Additionally, during the quarter, the Company continued software development expenditures to further enhance the TPA services. The Company expects to continue to grow software development expenditures.

Change in Income Tax Provision from the quarter ended September 30, 2010 to the quarter ended September 30, 2011

The Company’s income tax expense increased by $3.6 million, from $1.5 million for the quarter ended September 30, 2010 to $5.1 million for the quarter ended September 30, 2011 due to the increase in income before income taxes from $9.1 million to $13.0 million along with a decrease in the income tax rate. The income tax expense as a percentage of income before income taxes (i.e. effective tax rate) was 16.9% for the three months ended September 30, 2010 and 39.5% for the three months ended September 30, 2011. This increase in rate was due to the resolution of certain outstanding tax issues which resulted in a reduction to the income tax liability. The income tax provision rates were based upon management’s review of the Company’s estimated annual income tax rate, including state taxes. This effective tax rate differed from the statutory federal tax rate of 35.0% primarily due to state income taxes, the liability reduction and certain non-deductible expenses. The Company believes the income tax rate for the quarter ended September 30, 2011 is more reflective of the expected tax rates in the future.

Results of Operations for the six months ended September 30, 2010 and the six months ended September 30, 2011

The following table sets forth, for the periods indicated, the dollar amounts, dollar and percent changes, share changes, and the percentage of revenues represented by certain items reflected in the Company’s consolidated income statements for the six months ended September 30, 2010 and September 30, 2011. The Company’s past operating results are not necessarily indicative of future operating results.

Page 26

	Six Months Ended September 30, 2010			Six Months Ended September 30, 2011			Change			Percentage Change
Revenue	$	184,895,000		$	206,860,000		$	21,965,000			11.9	%
Cost of revenues		137,853,000			155,704,000			17,851,000			12.9	%
Gross profit		47,042,000			51,156,000			4,114,000			8.7	%
Gross profit as percentage of revenue		25.4	%		24.7	%
General and administrative		25,657,000			24,886,000			(771,000	)		(3.0	%)
General and administrative as percentage of revenue		13.9	%		12.0	%
Income before income tax provision		21,385,000			26,270,000			4,885,000			22.8	%
Income before income tax provision as percentage of revenue		11.6	%		12.7	%
Income tax provision		6,092,000			10,191,000			4,099,000			67.3	%
Net income	$	15,293,000		$	16,079,000		$	786,000			5.1	%
Weighted Shares
Basic		11,909,000			11,572,000			(337,000	)		(2.8	%)
Diluted		12,145,000			11,729,000			(416,000	)		(3.4	%)
Earnings Per Share
Basic	$	1.28		$	1.39		$	0.11			8.6	%
Diluted	$	1.26		$	1.37		$	0.11			8.7	%

Revenues

Change in revenue from the six months ended September 30, 2010 to the six months ended September 30, 2011

Revenues increased from $184.9 million for the six months ended September 30, 2010 to $206.9 million for the six months ended September 30, 2011, an increase of $22.0 million or 11.9%. The Company’s patient management revenues increased $10.4 million or 11.8% from $87.4 million in the six months ended September 30, 2010 to $97.8 million in the six months ended September 30, 2011. The increase in patient management services was primarily due to an increase in the level of services provided to existing TPA customers. The Company’s network solutions revenues increased from $97.5 million in the six months ended September 30, 2010 to $109.1 million in the six months ended September 30, 2011, an increase of $11.6 million or 11.9%. The increase in network solutions revenue was primarily due to an increase in the customer’s utilization of the Company’s pharmacy services and directed care services.

Change in cost of revenue from the six months ended September 30, 2010 to the six months ended September 30, 2011

The Company’s cost of revenues increased from $137.9 million in the six months ended September 30, 2010 to $155.7 million in the six months ended September 30, 2011, an increase of $17.9 million or 12.9%. This increase was primarily due to the costs associated with the increase in demand for the Company’s TPA services,

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pharmacy and directed care services. Cost of revenues increased by 13%, roughly approximating the 12% increase in revenues from the six months ended September 30, 2010 to the six months ended September 30, 2011. Direct salaries increased from $37.5 million for the six months ended September 30, 2010, to $40.2 million for the six months ended September 30, 2011. Direct pharmacy costs increased from $14.3 million for the six months ended September 30, 2010 to $21.0 million for the six months ended September 30, 2011. This increase in pharmacy costs is due to the increase in revenues noted above.

General and Administrative Expense

Change in cost of general and administrative expense from the six months ended September 30, 2010 to the six months ended September 30, 2011

General and administrative expense decreased from $25.7 million in the six months ended September 30, 2010 to $24.9 million in the six months ended September 30, 2011, a decrease of $0.8 million, or 3.0%. This decrease is primarily due to the accrual of $2.8 million for a settlement of the litigation note in Note H during the quarter ended September 30, 2010. Excluding this charge, general and administrative costs would have increased from $22.0 million for the six months ended September 30, 2010 to $24.9 million for the six months ended September 30, 2011. The largest portion of this increase was due to an increase in the Company’s system costs from $12.2 million to $13.4 million for these same periods. This increase in costs is primarily due to efforts to improve the Company’s proprietary claims systems and an increase in ongoing support and maintenance. Additionally, during the quarter, the Company continued software development expenditures to further enhance the TPA services. The Company expects to continue to grow software development expenditures.

Income Tax Provision

The Company’s income tax expense increased by $4.1 million, or 67.3%, from $6.1 million for the six months ended September 30, 2010 to $10.2 million for the six months ended September 30, 2011 due to the increase in income before income taxes from $21.4 million to $26.3 million and due to an increase in the income tax rate from fiscal 2011 to fiscal 2012. For the six months ended September 30, 2010, the Company’s income tax rate was just 28.5% due to the resolution of certain outstanding tax issues during the quarter ended September 30, 2010. The income tax expense as a percentage of income before income taxes, also known as the effective tax rate, was 28.5% for the six months ended September 30, 2010 and 38.8% for the six months ended September 30, 2011. The Company expects the future tax rate to approximate the rate during the six months ended September 30, 2011. The income tax provision rates were based upon management’s review of the Company’s estimated annual income tax rate, including state taxes. This effective tax rate differed from the statutory federal tax rate of 35.0% primarily due to state income taxes and certain non-deductible expenses offset by tax credits.

Liquidity and Capital Resources

The Company has historically funded its operations and capital expenditures primarily from cash flow from operations, and to a lesser extent, stock option exercises. Working capital increased $4.5 million, or 16%, from $27.4 million as of March 31, 2011 to $31.9 million as of September 30, 2011, primarily due to a decrease in accrued liabilities from $40.2 million as of March 31, 2011 to $30.3 million as of September 30, 2011, along with an increase in accounts receivable from $49.0 million to $50.8 million for these same to periods, respectively. The reduction in accrued liabilities was primarily due to the payment of $9 million into an escrow account towards the settlement of the litigation discussed in Note H. The increase in accounts receivable was primarily due to the increase in revenues from the quarter ended March 31, 2011 to the quarter ended September 30, 2011.

The Company believes that cash from operations and funds from exercises of stock options granted to employees are adequate to fund existing obligations, repurchase shares of the Company’s common stock under its current share repurchase program, introduce new services, and continue to develop healthcare related businesses for at least the next twelve months. The Company regularly evaluates cash requirements for current operations and commitments, and for capital acquisitions and other strategic transactions. The Company may elect to raise additional funds for these purposes, through debt or equity financings or otherwise, as appropriate. Additional equity or debt financing may not be available when needed, on terms favorable to the Company or at all.

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As of September 30, 2011, the Company had $8.1 million in cash and cash equivalents, invested primarily in short-term, interest-bearing, highly liquid investment-grade securities with maturities of 90 days or less in federally regulated banks.

In September 2011, the Company renewed a credit agreement that had been in place throughout fiscal 2011 and 2012. The line is with a financial institution to provide a revolving credit facility with borrowing capacity of up to $10 million. Borrowings under this agreement, as amended, bear interest, at the Company’s option, at a fixed LIBOR-based rate plus 1.50% or at a fluctuating rate determined by the financial institution to be 1.50% above the daily one-month LIBOR rate. The loan covenants require the Company to maintain the current assets to liabilities ratio of at least 1.25:1, debt to tangible net worth not greater than 1.25:1 and have positive net income. There were no outstanding revolving loans at any time during fiscal 2011 or the six months ended September 30, 2011, or as of the date hereof, but letters of credit in the aggregate amount of $8.0 million have been issued separate from the line of credit and therefore do not reduce the amount of borrowings available under the revolving credit facility. The renewed credit agreement expires in September 2012. The Company expects to renew the line of credit at that time.

The Company has historically required substantial capital to fund the growth of its operations, particularly working capital to fund the growth in accounts receivable and capital expenditures. The Company believes, however, that the cash balance at September 30, 2011 along with anticipated internally generated funds, will be sufficient to meet the Company’s expected cash requirements for at least the next twelve months.

Operating Cash Flows

Six months ended September 30, 2010 compared to six months ended September 30, 2011

Net cash provided by operating activities decreased from $23.9 million in the six months ended September 30, 2010 to $15.9 million in the six months ended September 30, 2011. The decrease in cash flow from operating activities was primarily to the payment of $9.0 million into escrow towards settlement of the litigation noted in Note H.

Investing Activities

Six months ended September 30, 2010 compared to six months ended September 30, 2011

Net cash flow used in investing activities increased from $9.0 million in the six months ended September 30, 2010 to $11.7 million in the six months ended September 30, 2011, an increase of $2.6 million. The increase in net cash used in investing activities is primarily due to an increase in the software development activity and capitalization in the six months ended September 30, 2011 compared to the same period for the prior year.

Financing Activities

Six months ended September 30, 2010 compared to six months ended September 30, 2011

Net cash flow used in financing activities decreased from $8.6 million for the six months ended September 30, 2010 to $8.4 million for the six months ended September 30, 2011, a decrease of $0.3 million. The decrease in cash flow used in financing activities was primarily due to a decrease in the amount of purchases under the Company’s share repurchase program. During the six months ended September 30, 2011, the Company spent $10.0 million to repurchase 218,202 shares of its common stock. During the six months ended September 30, 2010, the Company spent $11.8 million to repurchase 317,485 shares of its common stock. The Company has historically used cash provided by operating activities and from the exercise of stock options to repurchase stock. The Company expects it may use some of the $8.1 million of cash on its balance sheet at September 30, 2011 to repurchase additional shares of stock.

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Contractual Obligations

The following table summarizes the Company’s contractual obligations outstanding as of September 30, 2011.

	Payments Due by Period
	Total		Within One Year		Between One and Three Years		Between Three and Five Years		More than Five Years
Operating leases	$	48,231,000	$	13,002,000	$	19,228,000	$	12,306,000	$	3,695,000
Uncertain tax positions		1,529,000		1,529,000		—		—		—
Software licenses		861,000		861,000		—		—		—
Total	$	50,621,000	$	15,392,000	$	19,228,000	$	12,306,000	$	3,695,000

Operating leases are rents paid for the Company’s physical locations.

Litigation

On March 25, 2011, George Raymond Williams, MD. (“Williams”), as plaintiff, individually and on behalf of those similarly situated, filed a First Amended and Restated Petition for Damages and Class Certification in the 27^th Judicial District Court, Parish of St. Landry, Louisiana, against CorVel Corporation (“CorVel”) and its insurance carriers, Homeland Insurance Company of New York and Executive Risk Specialty Insurance Company and several other unrelated parties. Williams alleges that CorVel violated Louisiana’s Any Willing Provider Act (the “AWPA”), which requires a payor accessing a preferred provider contract to give 30 days’ advance written notice or point of service notice in the form of a benefit card before the payor accesses the discounted rates in the contract to pay the provider for services rendered to an insured under that payor’s health benefit plan.

On March 31, 2011, CorVel entered into a Memorandum of Understanding with attorneys representing the plaintiffs and the class setting forth the terms of settlement of this class action lawsuit. The Memorandum of Understanding provides that subject to the execution of a mutually acceptable settlement agreement and final non-appealable approval of such settlement by the Louisiana state court, CorVel will pay $9 million to resolve claims for which CorVel recorded a $9 million pre-tax charge to earnings during the March 2011 quarter. In addition, CorVel will assign to the class certain rights it has to the proceeds of CorVel’s insurance policies relating to the claims asserted by the class. The class action arbitration filed with the American Arbitration Association against CorVel in December 2006 by Southwest Louisiana Hospital Association dba Lake Charles Memorial Hospital as previously disclosed by CorVel is encompassed within the settlement terms of the Memorandum of Understanding. Pursuant to the Memorandum of Understanding, the parties have also agreed to request that the appropriate courts stay all related proceedings in State and Federal Court, as well as the Louisiana Office of Workers Compensation and the arbitration proceeding before the American Arbitration Association in which the parties are named, until the settlement agreement is prepared, executed and receives final court approval. The settlement does not constitute an admission of liability.

On June 23, 2011 CorVel and class counsel executed a definitive settlement agreement. The settlement agreement contains the same terms and conditions as were set forth in the Memorandum of Understanding. Accordingly, CorVel made a $9 million cash payment into escrow on July 6, 2011. As set forth in the settlement agreement, certain contingencies such as preliminary court approval, resolutions of objections filed by class members challenging the fairness of the settlement, class members excluded from the settlement not exceeding a materiality threshold, and final court approval, must be satisfied before the settlement become final.

On June 23, 2011, the 27^th Judicial District Court for the Parish of St. Landry, Louisiana granted preliminary approval of settlement. Notice of the settlement is being given to Class Members. The Court has set a deadline of October 16, 2011 for parties to opt out of or object to the proposed settlement. The court has set the hearing for final approval on November 4, 2011.

In exchange for the settlement payment by CorVel, class members are expected to release CorVel and all of its affiliates and clients for any claims relating in any way to re-pricing, payment for, or

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reimbursement of a workers’ compensation bill, including but not limited to claims under the AWPA. Plaintiffs have also agreed to a notice procedure that CorVel may follow in the future to comply with the AWPA. As noted, the Memorandum of Understanding is contingent upon the execution of a mutually acceptable definitive settlement agreement. Under Louisiana law, once the parties have executed such a settlement agreement, they must apply to the court for approval of the settlement following a court-supervised process of notice to the class and an opportunity for the class to be heard about the fairness of the settlement or to be excluded from the settlement. CorVel expects to be able to arrive at such a definitive settlement agreement by the end of December 2011, but there can be no assurance that the parties will be able to reach a definitive settlement agreement within that timeframe or at all, that the court will approve the settlement or that a large number of class members will not opt out of the settlement. If a definitive settlement agreement is not reached or is not approved by the court, all related proceedings in State and Federal Court, as well as the Louisiana Office of Workers Compensation and the arbitration proceeding before the American Arbitration Association that have been stayed pending settlement will resume.

In February 2005, Kathleen Roche, D.C., as plaintiff, filed a putative class action in Circuit Court for the 20th Judicial District, St. Clair County, Illinois, against the Company. The case sought unspecified damages based on the Company’s alleged failure to direct patients to medical providers who were members of the CorVel CorCare PPO network and also alleged that the Company used biased and arbitrary computer software to review medical providers’ bills. On October 29, 2010, the Company entered into a settlement agreement providing for the payment $2.1 million to class members and up to an additional $700,000 for attorneys’ fees and expenses, and as a result the Company accrued $2.8 million of estimated liability for this settlement agreement during the quarter ended September 30, 2010. Initial payments were sent to class members on July 18, 2011. The Company denies that its conduct was improper in any way and has denied all liability. In exchange for the settlement payment by the Company, class members consisting of Illinois medical providers (excluding hospitals) have released the Company and all of its affiliates for claims relating to any PPO or usual and customary reductions recommended by the Company on class members’ medical bills. On January 21, 2011, the Circuit Court gave final approval to the settlement and awarded class counsel $700,000 in attorneys’ fees and expenses and a $5,000 incentive award to Kathleen Roche, the class representative.

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

Inflation

The Company experiences pricing pressures in the form of competitive prices. The Company is also impacted by rising costs for certain inflation-sensitive operating expenses such as labor and employee benefits, and facility leases. However, the Company generally does not believe these impacts are material to its revenues or net income.

Off-Balance Sheet Arrangements

The Company is not a party to off-balance sheet arrangements as defined by the rules of the Securities and Exchange Commission. However, from time to time the Company enters into certain types of contracts that contingently require the Company to indemnify parties against third-party claims. The contracts primarily relate to: (i) certain contracts to perform services, under which the Company may provide customary indemnification to the purchases of such services; (ii) certain real estate leases, under which the Company may be required to indemnify property owners for environmental and other liabilities, and other claims arising from the Company’s use of the applicable premises; and (iii) certain agreements with the Company’s officers, directors and employees, under which the Company may be required to indemnify such persons for liabilities arising out of their relationship with the Company.

The terms of such obligations vary by contract and in most instances a specific or maximum dollar amount is not explicitly stated therein. Generally, amounts under these contracts cannot be reasonably estimated until a specific claim is asserted. Consequently, no liabilities have been recorded for these obligations on the Company’s balance sheets for any of the periods presented.

Critical Accounting Policies

The SEC defines critical accounting policies as those that require application of management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods.

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The following is not intended to be a comprehensive list of our accounting policies. Our significant accounting policies are more fully described in Note A to the Consolidated Financial Statements. In many cases, the accounting treatment of a particular transaction is specifically dictated by accounting principles generally accepted in the United States of America, with no need for management’s judgment in their application. There are also areas in which management’s judgment in selecting an available alternative would not produce a materially different result.

We have identified the following accounting policies as critical to us: 1) revenue recognition, 2) cost of revenues, 3) allowance for uncollectible accounts, 4) goodwill and long-lived assets, 5) accrual for self-insured costs, 6) accounting for income taxes, and 7) share-based compensation.

Revenue Recognition: The Company recognizes revenue when there is persuasive evidence of an arrangement, the services have been provided to the customer, the sales price is fixed or determinable, and collectability is reasonably assured. For the Company’s services, as the Company’s professional staff performs work, they are contractually permitted to bill for fees earned in fraction of an hour increments worked or by units of production. The Company recognizes revenue as the time is worked or as units of production are completed, which is when the revenue is earned and realized. Labor costs are recognized as the costs are incurred. The Company derives the majority of its revenue from the sale of Network Solutions and Patient Management services. Network Solutions and Patient Management services may be sold individually or combined with any of the services the Company provides. When a sale combines multiple elements, the Company accounts for multiple element arrangements in accordance with the guidance included in ASC 605-25.

In accordance with ASC 605-25, the Company allocates revenue for transactions or collaborations that include multiple elements to each unit of accounting based on its relative fair value, and recognizes revenue for each unit of accounting when the revenue recognition criteria have been met. The price charged when the element is sold separately generally determines fair value. When our customers purchase several products from CorVel, the pricing of the products sold is generally the same as if the product were sold on an individual basis. As a result, the fair value of each product sold in a multiple element arrangement is almost always determinable. The Company recognizes revenue for delivered elements when the delivered elements have standalone value and the Company has objective and reliable evidence of fair value for each undelivered element. If the fair value of any undelivered element included in a multiple element arrangement cannot be objectively determined, revenue is deferred until all elements are delivered and services have been performed, or until fair value can objectively be determined for any remaining undelivered elements. Based upon the nature of our products, bundled products are generally delivered in the same accounting period.

The FASB issued Accounting Standards Update No. 2009-13, Multiple Deliverable Revenue Arrangements—a consensus of FASB Emerging Issues Task Force (“ASU 2009-13”). ASU 2009-13 provides for less restrictive separation criteria that must be met for a deliverable to be considered a separate unit of accounting. Additionally, under this Standard, there is a hierarchy for determining the selling price of a unit of accounting and consideration must be allocated using a relative-selling price method. ASU 2009-13 was be effective for CorVel Corporation on April 1, 2011. We reviewed the requirements of ASU 2009-13 and determined the pronouncement had no material impact on our financial position or results of operations.

Cost of revenues: Cost of services consists primarily of the compensation and fringe benefits of field personnel, including managers, medical bill analysts, field case managers, telephonic case managers, systems support, administrative support and account managers and account executives and related facility costs including rent, telephone and office supplies. Historically, the costs associated with these additional personnel and facilities have been the most significant factor driving increases in the Company’s cost of services. Locally managed and incurred IT costs are charged to cost of revenues whereas the costs incurred and managed at the corporate offices are charged to general and administrative expense.

Allowance for Uncollectible Accounts: The Company determines its allowance by considering a number of factors, including the length of time trade accounts receivable are past due, the Company’s previous loss history, the customers’ current ability to pay its obligation to the Company, and the condition of the general economy and the industry as a whole. The Company writes off accounts receivable when they become uncollectible.

The Company must make significant management judgments and estimates in determining contractual and bad debt allowances in any accounting period. One significant uncertainty inherent in the Company’s analysis is whether its past experience will be indicative of future periods. Although the Company considers future projections when estimating contractual and bad debt allowances, the Company ultimately makes its decisions based on the best

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information available to it at that time. Adverse changes in general economic conditions or trends in reimbursement amounts for the Company’s services could affect the Company’s contractual and bad debt allowance estimates, collection of accounts receivable, cash flows, and results of operations. No one customer accounted for 10% or more of accounts receivable at March 31, 2011 or September 30, 2011.

Goodwill and Long-Lived Assets: Goodwill arising from business combinations represents the excess of the purchase price over the estimated fair value of the net assets of the acquired business. Pursuant to ASC 350-10 through ASC 350-30, “Goodwill and Other Intangible Assets,” goodwill is tested annually for impairment or more frequently if circumstances indicate the potential for impairment. Also, management tests for impairment of its amortizable intangible assets and long-lived assets and whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company’s impairment analysis of goodwill is conducted at a company-wide level. The measurement of fair value is based on an evaluation of market capitalization and is further tested using a multiple of earnings approach. In projecting the Company’s cash flows, management considers industry growth rates and trends and cost structure changes. No changes or events occurred which indicated a need to test impairment during the quarter. However, future events or changes in current circumstances could affect the recoverability of the carrying value of goodwill and long-lived assets. Should an asset be deemed impaired, an impairment loss would be recognized to the extent the carrying value of the asset exceeded its estimated fair market value.

Accrual for Self-insurance Costs: The Company self-insures for the group medical costs and workers’ compensation costs of its employees. The Company purchases stop loss insurance for large claims. Management believes that the self-insurance reserves are appropriate; however, actual claims costs may differ from the original estimates requiring adjustments to the reserves. The Company determines its estimated self-insurance reserves based upon historical trends along with outstanding claims information provided by its claims paying agents.

Accounting for Income Taxes: The Company provides for income taxes in accordance with provisions specified in ASC 740, “Accounting for Income Taxes”, which is based upon management’s judgments and estimations of various tax rates. Accordingly, deferred income tax assets and liabilities are computed for differences between the financial statement and tax bases of assets and liabilities. These differences will result in taxable or deductible amounts in the future, based on tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which temporary differences become deductible. In making an assessment regarding the probability of realizing a benefit from these deductible differences, management considers the Company’s current and past performance, the market environment in which the Company operates, tax-planning strategies and the length of carry-forward periods for loss carry-forwards, if any. Valuation allowances are established when necessary to reduce deferred tax assets to amounts that are more likely than not to be realized. Further, the Company provides for income tax issues not yet resolved with federal, state and local tax authorities.

Share-Based Compensation: The Company accounts for share based compensation in accordance with the provisions of ASC Topic 718 “Compensation—Stock Compensation”. Under ASC 718, share-based compensation cost is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the employee’s requisite service period (generally the vesting period of the equity grant). Some of the stock options are performance based and the stock compensation expense is recorded based upon the actual results compared to the option targets. For the quarter ended September 30, 2011, the Company recorded share-based compensation expense of $671,000. Share-based compensation expense recognized in fiscal 2012 is based on awards ultimately expected to vest; therefore, it has been reduced for estimated forfeitures. ASC Topic 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

The Company estimates the fair value of stock options using the Black-Scholes valuation model. Key input assumptions used to estimate the fair value of stock options include the exercise price of the award, the expected option term, the expected volatility of the Company’s stock over the option’s expected term, the risk-free interest rate over the option’s term, and the Company’s expected annual dividend yield. The Company’s management believes that the valuation technique and the approach utilized to develop the underlying assumptions are appropriate in calculating the fair values of the Company’s stock options granted in fiscal 2011 and 2012. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by persons who receive equity awards.

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Recent Accounting Standards Update

In September 2011, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance allowing entities testing goodwill for impairment to perform a qualitative assessment to determine whether further impairment testing is necessary. If entities determine, on the basis of qualitative factors, that it is more likely than not that a reporting unit’s fair value is greater than the carrying amount, a quantitative calculation may not be needed. This update is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Adoption of the standard is not expected to have a material impact on our financial position, results of operations, or cash flows.

Item 3 — Quantitative and Qualitative Disclosures About Market Risk

As of September 30, 2011, the Company held no market risk sensitive instruments for trading purposes, and the Company did not employ any derivative financial instruments, other financial instruments, or derivative commodity instruments to hedge any market risk. The Company had no debt outstanding as of September 30, 2011, and therefore, had no market risk related to debt.

Item 4 — Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management has evaluated, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as defined in

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Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that, as of September 30, 2011, our disclosure controls and procedures were effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the Securities and Exchange Commission and (ii) accumulated and communicated to our management, including our principal executive and principal accounting officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) during the three months ended September 30, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1 — Legal Proceedings

On March 25, 2011, George Raymond Williams, MD. (“Williams”), as plaintiff, individually and on behalf of those similarly situated, filed a First Amended and Restated Petition for Damages and Class Certification in the 27^th Judicial District Court, Parish of St. Landry, Louisiana, against CorVel Corporation (“CorVel”) and its insurance carriers, Homeland Insurance Company of New York and Executive Risk Specialty Insurance Company and several other unrelated parties. Williams alleges that CorVel violated Louisiana’s Any Willing Provider Act (the “AWPA”), which requires a payor accessing a preferred provider contract to give 30 days’ advance written notice or point of service notice in the form of a benefit card before the payor accesses the discounted rates in the contract to pay the provider for services rendered to an insured under that payor’s health benefit plan.

On March 31, 2011, CorVel entered into a Memorandum of Understanding with attorneys representing the plaintiffs and the class setting forth the terms of settlement of this class action lawsuit. The Memorandum of Understanding provides that subject to the execution of a mutually acceptable settlement agreement and final non-appealable approval of such settlement by the Louisiana state court, CorVel will pay $9 million to resolve claims for which CorVel recorded a $9 million pre-tax charge to earnings during the March 2011 quarter. In addition, CorVel will assign to the class certain rights it has to the proceeds of CorVel’s insurance policies relating to the claims asserted by the class. The class action arbitration filed with the American Arbitration Association against CorVel in December 2006 by Southwest Louisiana Hospital Association dba Lake Charles Memorial Hospital as previously disclosed by CorVel is encompassed within the settlement terms of the Memorandum of Understanding. Pursuant to the Memorandum of Understanding, the parties have also agreed to request that the appropriate courts stay all related proceedings in State and Federal Court, as well as the Louisiana Office of Workers Compensation and the arbitration proceeding before the American Arbitration Association in which the parties are named, until the settlement agreement is prepared, executed and receives final court approval. The settlement does not constitute an admission of liability.

On June 23, 2011 CorVel and class counsel executed a definitive settlement agreement. The settlement agreement contains the same terms and conditions as were set forth in the Memorandum of Understanding. Accordingly, CorVel made a $9 million cash payment into escrow on July 6, 2011. As set forth in the settlement agreement, certain contingencies such as preliminary court approval, resolutions of objections filed by class members challenging the fairness of the settlement, class members excluded from the settlement not exceeding a materiality threshold, and final court approval, must be satisfied before the settlement become final.

On June 23, 2011, the 27^th Judicial District Court for the Parish of St. Landry, Louisiana granted preliminary approval of settlement. Notice of the Settlement is being given to Class Members. The Court has set a deadline of October 16, 2011 for parties to opt out of or object to the proposed settlement. The court has set the hearing for final approval on November 4, 2011.

In exchange for the settlement payment by CorVel, class members are expected to release CorVel and all of its affiliates and clients for any claims relating in any way to re-pricing, payment for, or

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reimbursement of a workers’ compensation bill, including but not limited to claims under the AWPA. Plaintiffs have also agreed to a notice procedure that CorVel may follow in the future to comply with the AWPA. As noted, the Memorandum of Understanding is contingent upon the execution of a mutually acceptable definitive settlement agreement. Under Louisiana law, once the parties have executed such a settlement agreement, they must apply to the court for approval of the settlement following a court-supervised process of notice to the class and an opportunity for the class to be heard about the fairness of the settlement or to be excluded from the settlement. CorVel expects to be able to arrive at such a definitive settlement agreement by the end of December 2011, but there can be no assurance that the parties will be able to reach a definitive settlement agreement within that timeframe or at all, that the court will approve the settlement or that a large number of class members will not opt out of the settlement. If a definitive settlement agreement is not reached or is not approved by the court, all related proceedings in State and Federal Court, as well as the Louisiana Office of Workers Compensation and the arbitration proceeding before the American Arbitration Association that have been stayed pending settlement will resume.

In February 2005, Kathleen Roche, D.C., as plaintiff, filed a putative class action in Circuit Court for the 20th Judicial District, St. Clair County, Illinois, against the Company. The case sought unspecified damages based on the Company’s alleged failure to direct patients to medical providers who were members of the CorVel CorCare PPO network and also alleged that the Company used biased and arbitrary computer software to review medical providers’ bills. On October 29, 2010, the Company entered into a settlement agreement providing for the payment $2.1 million to class members and up to an additional $700,000 for attorneys’ fees and expenses, and as a result the Company accrued $2.8 million of estimated liability for this settlement agreement during the quarter ended September 30, 2010. Initial payments were sent to class members on July 18, 2011. The Company denies that its conduct was improper in any way and has denied all liability. In exchange for the settlement payment by the Company, class members consisting of Illinois medical providers (excluding hospitals) have released the Company and all of its affiliates for claims relating to any PPO or usual and customary reductions recommended by the Company on class members’ medical bills. On January 21, 2011, the Circuit Court gave final approval to the settlement and awarded class counsel $700,000 in attorneys’ fees and expenses and a $5,000 incentive award to Kathleen Roche, the class representative.

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

Item 1A. Risk Factors

Past financial performance is not necessarily a reliable indicator of future performance, and investors in our common stock should not use historical performance to anticipate results or future period trends. Investing in our common stock involves a high degree of risk. Investors should consider carefully the following risk factors, as well as the other information in this report and our other filings with the Securities and Exchange Commission, including our consolidated financial statements and the related notes, before deciding whether to invest or maintain an investment in shares of our common stock. If any of the following risks actually occurs, our business, financial condition and results of operations would suffer. In this case, the trading price of our common stock would likely decline. The risks described below are not the only ones we face. Additional risks that we currently do not know about or that we currently believe to be immaterial also may impair our business operations.

Legal

Exposure to possible litigation and legal liability may adversely affect our business, financial condition and results of operations.

We, through our utilization management services, make recommendations concerning the appropriateness of providers’ medical treatment plans of patients throughout the country, and as a result, could be exposed to claims for adverse medical consequences. We do not grant or deny claims for payment of benefits and we do not believe that we engage in the practice of medicine or the delivery of medical services. There can be no assurance, however, that we will not be subject to claims or litigation related to the authorization or denial of claims for payment of benefits or allegations that we engage in the practice of medicine or the delivery of medical services.

In addition, there can be no assurance that we will not be subject to other litigation that may adversely affect our business, financial condition or results of operations, including but not limited to being joined in litigation brought against our customers in the managed care industry. We maintain professional liability insurance and such other coverages as we believe are reasonable in light of our experience to date. If such insurance is insufficient or unavailable in the future at reasonable cost to protect us from liability, our business, financial condition or results of operations could be adversely affected.

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On March 25, 2011, George Raymond Williams, MD. (“Williams”), as plaintiff, individually and on behalf of those similarly situated, filed a First Amended and Restated Petition for Damages and Class Certification in the 27^th Judicial District Court, Parish of St. Landry, Louisiana, against CorVel Corporation (“CorVel”) and its insurance carriers, Homeland Insurance Company of New York and Executive Risk Specialty Insurance Company and several other unrelated parties. Williams alleges that CorVel violated Louisiana’s Any Willing Provider Act (the “AWPA”), which requires a payor accessing a preferred provider contract to give 30 days’ advance written notice or point of service notice in the form of a benefit card before the payor accesses the discounted rates in the contract to pay the provider for services rendered to an insured under that payor’s health benefit plan.

On March 31, 2011, CorVel entered into a Memorandum of Understanding with attorneys representing the plaintiffs and the class setting forth the terms of settlement of this class action lawsuit. The Memorandum of Understanding provides that subject to the execution of a mutually acceptable settlement agreement and final non-appealable approval of such settlement by the Louisiana state court, CorVel will pay $9 million to resolve claims for which CorVel recorded a $9 million pre-tax charge to earnings during the March 2011 quarter. In addition, CorVel will assign to the class certain rights it has to the proceeds of CorVel’s insurance policies relating to the claims asserted by the class. The class action arbitration filed with the American Arbitration Association against CorVel in December 2006 by Southwest Louisiana Hospital Association dba Lake Charles Memorial Hospital as previously disclosed by CorVel is encompassed within the settlement terms of the Memorandum of Understanding. Pursuant to the Memorandum of Understanding, the parties have also agreed to request that the appropriate courts stay all related proceedings in State and Federal Court, as well as the Louisiana Office of Workers Compensation and the arbitration proceeding before the American Arbitration Association in which the parties are named, until the settlement agreement is prepared, executed and receives final court approval. The settlement does not constitute an admission of liability.

On June 23, 2011 CorVel and class counsel executed a definitive settlement agreement. The settlement agreement contains the same terms and conditions as were set forth in the Memorandum of Understanding. Accordingly, CorVel made a $9 million cash payment into escrow on July 6, 2011. As set forth in the settlement agreement, certain contingencies such as preliminary court approval, resolutions of objections filed by class members challenging the fairness of the settlement, class members excluded from the settlement not exceeding a materiality threshold, and final court approval, must be satisfied before the settlement become final.

On June 23, 2011, the 27^th Judicial District Court for the Parish of St. Landry, Louisiana granted preliminary approval of settlement. Notice of the Settlement is being given to Class Members. The Court has set a deadline of October 16, 2011 for parties to opt out of or object to the proposed settlement. The court has set the hearing for final approval on November 4, 2011.

In exchange for the settlement payment by CorVel, class members are expected to release CorVel and all of its affiliates and clients for any claims relating in any way to re-pricing, payment for, or reimbursement of a workers’ compensation bill, including but not limited to claims under the AWPA. Plaintiffs have also agreed to a notice procedure that CorVel may follow in the future to comply with the AWPA. As noted, the Memorandum of Understanding is contingent upon the execution of a mutually acceptable definitive settlement agreement. Under Louisiana law, once the parties have executed such a settlement agreement, they must apply to the court for approval of the settlement following a court-supervised process of notice to the class and an opportunity for the class to be heard about the fairness of the settlement or to be excluded from the settlement. CorVel expects to be able to arrive at such a definitive settlement agreement by the end of December 2011, but there can be no assurance that the parties will be able to reach a definitive settlement agreement within that timeframe or at all, that the court will approve the settlement or that a large number of class members will not opt out of the settlement. If a definitive settlement agreement is not reached or is not approved by the court, all related proceedings in State and Federal Court, as well as the Louisiana Office of Workers Compensation and the arbitration proceeding before the American Arbitration Association that have been stayed pending settlement will resume.

In February 2005, Kathleen Roche, D.C., as plaintiff, filed a putative class action in Circuit Court for the 20th Judicial District, St. Clair County, Illinois, against the Company. The case sought unspecified damages based on the Company’s alleged failure to direct patients to medical providers who were members of the CorVel CorCare PPO network and also alleged that the Company used biased and arbitrary computer software to review medical providers’ bills. On October 29, 2010, the Company entered into a settlement agreement providing for the payment $2.1 million to class members and up to an additional $700,000 for attorneys’ fees and expenses, and as a result the Company accrued $2.8 million of estimated liability for this settlement agreement during the quarter ended September 30, 2010. Initial payments were sent to class members on July 18, 2011. The Company denies that its conduct was improper in any way and has denied all liability. In exchange for the settlement payment by the Company, class members consisting of Illinois medical providers (excluding hospitals) have released the Company and all of its affiliates for claims relating to any PPO or usual and customary reductions recommended by the Company on class members’ medical bills. On January 21, 2011, the Circuit Court gave final approval to the settlement and awarded class counsel $700,000 in attorneys’ fees and expenses and a $5,000 incentive award to Kathleen Roche, the class representative.

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

The increased costs of professional and general liability insurance may have an adverse effect on our profitability.

The cost of commercial professional and general liability insurance coverage has risen significantly in the past several years, and this trend may continue. In addition, if we were to suffer a material loss, our costs may increase over and above the general increases in the industry. If the costs associated with insuring our business continue to increase, it may adversely affect our business. We believe our current level of insurance coverage is adequate for a company of our size engaged in our business.

If lawsuits against us are successful, we may incur significant liabilities.

We provide to insurers and other payors of healthcare costs managed care programs that utilize preferred provider organizations and computerized bill review programs. Health care providers have brought, against us and our customers, individual and class action lawsuits challenging such programs. If such lawsuits are successful, we may incur significant liabilities.

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We make recommendations about the appropriateness of providers’ proposed medical treatment plans for patients throughout the country. As a result, we could be subject to claims arising from any adverse medical consequences. Although plaintiffs have not to date subjected us to any claims or litigation relating to the granting or denial of claims for payment of benefits or allegations that we engage in the practice of medicine or the delivery of medical services, we cannot assure you that plaintiffs will not make such claims in future litigation. We also cannot assure you that our insurance will provide sufficient coverage or that insurance companies will make insurance available at a reasonable cost to protect us from significant future liability.

Regulatory

Changes in government regulations could increase our costs of operations and/or reduce the demand for our services.

Many states, including a number of those in which we transact business, have licensing and other regulatory requirements applicable to our business. Approximately half of the states have enacted laws that require licensing of businesses which provide medical review services such as ours. Some of these laws apply to medical review of care covered by workers’ compensation. These laws typically establish minimum standards for qualifications of personnel, confidentiality, internal quality control and dispute resolution procedures. These regulatory programs may result in increased costs of operation for us, which may have an adverse impact upon our ability to compete with other available alternatives for healthcare cost control. In addition, new laws regulating the operation of managed care provider networks have been adopted by a number of states. These laws may apply to managed care provider networks having contracts with us or to provider networks which we may organize. To the extent we are governed by these regulations, we may be subject to additional licensing requirements, financial and operational oversight and procedural standards for beneficiaries and providers.

Regulation in the healthcare and workers’ compensation fields is constantly evolving. We are unable to predict what additional government initiatives, if any, affecting our business may be promulgated in the future. Our business may be adversely affected by failure to comply with existing laws and regulations, failure to obtain necessary licenses and government approvals or failure to adapt to new or modified regulatory requirements. Proposals for healthcare legislative reforms are regularly considered at the federal and state levels. To the extent that such proposals affect workers’ compensation, such proposals may adversely affect our business, financial condition and results of operations.

In addition, changes in workers’ compensation, auto and managed health care laws or regulations may reduce demand for our services, require us to develop new or modified services to meet the demands of the marketplace or reduce the fees that we may charge for our services. One proposal which had been considered in the past, but not enacted by Congress or certain state legislatures, is 24-hour health coverage, in which the coverage of traditional employer-sponsored health plans is combined with workers’ compensation coverage to provide a single insurance plan for work-related and non-work-related health problems.

We are subject to risks associated with acquisitions of intangible assets.

Our acquisition of other businesses may result in significant increases in our intangible assets and goodwill. We regularly evaluate whether events and circumstances have occurred indicating that any portion of our intangible assets and goodwill may not be recoverable. When factors indicate that intangible assets and goodwill should be evaluated for possible impairment, we may be required to reduce the carrying value of these assets. We cannot currently estimate the timing and amount of any such charges.

Business Environment

Growth Oriented

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If we fail to grow our business internally or through strategic acquisitions we may be unable to execute our business plan, maintain high levels of service or adequately address competitive challenges.

Our strategy is to continue internal growth and, as strategic opportunities arise in the workers’ compensation managed care industry, to consider acquisitions of, or relationships with, other companies in related lines of business. As a result, we are subject to certain growth-related risks, including the risk that we will be unable to retain personnel or acquire other resources necessary to service such growth adequately. Expenses arising from our efforts to increase our market penetration may have a negative impact on operating results. In addition, there can be no assurance that any suitable opportunities for strategic acquisitions or relationships will arise or, if they do arise, that the transactions contemplated could be completed. If such a transaction does occur, there can be no assurance that we will be able to integrate effectively any acquired business. In addition, any such transaction would be subject to various risks associated with the acquisition of businesses, including, but not limited to, the following:

• an acquisition may negatively impact our results of operations because it may require incurring large one-time charges, substantial debt or liabilities; it may require the amortization or write down of amounts related to deferred compensation, goodwill and other intangible assets; or it may cause adverse tax consequences, substantial depreciation or deferred compensation charges;

• we may encounter difficulties in assimilating and integrating the business, technologies, products, services, personnel or operations of companies that are acquired, particularly if key personnel of the acquired company decide not to work for us;

• an acquisition may disrupt ongoing business, divert resources, increase expenses and distract management;

• the acquired businesses, products, services or technologies may not generate sufficient revenue to offset acquisition costs;

• we may have to issue equity or debt securities to complete an acquisition, which would dilute the position of stockholders and could adversely affect the market price of our common stock; and

• acquisitions may involve the entry into a geographic or business market in which we have little or no prior experience.

There can be no assurance that we will be able to identify or consummate any future acquisitions or other strategic relationships on favorable terms, or at all, or that any future acquisition or other strategic relationship will not have an adverse impact on our business or results of operations. If suitable opportunities arise, we may finance such transactions, as well as internal growth, through debt or equity financing. There can be no assurance, however, that such debt or equity financing would be available to us on acceptable terms when, and if, suitable strategic opportunities arise.

If we are unable to increase our market share among national and regional insurance carriers and large, self-funded employers, our results may be adversely affected.

Our business strategy and future success depend in part on our ability to capture market share with our cost containment services as national and regional insurance carriers and large, self-funded employers look for ways to achieve cost savings. We cannot assure you that we will successfully market our services to these insurance carriers and employers or that they will not resort to other means to achieve cost savings. Additionally, our ability to capture additional market share may be adversely affected by the decision of potential customers to perform services internally instead of outsourcing the provision of such services to us. Furthermore, we may not be able to demonstrate sufficient cost savings to potential or current customers to induce them not to provide comparable services internally or to accelerate efforts to provide such services internally.

If competition increases, our growth and profits may decline.

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The markets for our network services and patient management services are also fragmented and competitive. Our competitors include national managed care providers, preferred provider networks, smaller independent providers and insurance companies. Companies that offer one or more workers’ compensation managed care services on a national basis are our primary competitors. We also compete with many smaller vendors who generally provide unbundled services on a local level, particularly companies with an established relationship with a local insurance company adjuster. In addition, several large workers’ compensation insurance carriers offer managed care services for their customers, either by performance of the services in-house or by outsourcing to organizations like ours. If these carriers increase their performance of these services in-house, our business may be adversely affected. In addition, consolidation in the industry may result in carriers performing more of such services in-house.

Our sequential revenue may not increase and may decline. As a result, we may fail to meet or exceed the expectations of investors or analysts which could cause our common stock price to decline.

Our sequential revenue growth may not increase and may decline in the future as a result of a variety of factors, many of which are outside of our control. If changes in our sequential revenue fall below the expectations of investors or analysts, the price of our common stock could decline substantially. Fluctuations or declines in sequential revenue growth may be due to a number of factors, including, but not limited to, those listed below and identified throughout this “Risk Factors” section: the decline in manufacturing employment, the decline in workers’ compensation claims, the decline in healthcare expenditures, the considerable price competition in a flat-to-declining workers’ compensation market, litigation, the increase in competition, and the changes and the potential changes in state workers’ compensation and automobile managed care laws which can reduce demand for our services. These factors create an environment where revenue and margin growth is more difficult to attain and where revenue growth is less certain than historically experienced. Additionally, our technology and preferred provider network face competition from companies that have more resources available to them than we do. Also, some customers may handle their managed care services in-house and may reduce the amount of services which are outsourced to managed care companies such as CorVel. These factors could cause the market price of our common stock to fluctuate substantially. There can be no assurance that our growth rate in the future, if any, will be at or near historical levels.

In addition, the stock market has in the past experienced price and volume fluctuations that have particularly affected companies in the healthcare and managed care markets resulting in changes in the market price of the stock of many companies, which may not have been directly related to the operating performance of those companies

Due to the foregoing factors, and the other risks discussed in this report, investors should not rely on period-to-period comparisons of our results of operations as an indication of our future performance.

If the referrals for our patient management services decline, our business, financial condition and results of operations would be materially adversely affected.

In some years, we have experienced a general decline in the revenue and operating performance of patient management services. We believe that the performance decline has been due to the following factors: the decrease of the number of workplace injuries that have become longer-term disability cases; increased regional and local competition from providers of managed care services; a possible reduction by insurers on the types of services provided by our patient management business; the closure of offices and continuing consolidation of our patient management operations; and employee turnover, including management personnel, in our patient management business. In the past, these factors have all contributed to the lowering of our long-term outlook for our patient management services. If some or all of these conditions continue, we believe that the performance of our patient management revenues could decrease.

Customers

If we lose several customers in a short period, our results may be materially adversely affected.

Our results may decline if we lose several customers during a short period. Most of our customer contracts permit either party to terminate without cause. If several customers terminate, or do not renew or extend their

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contracts with us, our results could be materially and adversely affected. Many organizations in the insurance industry have consolidated and this could result in the loss of one or more of our customers through a merger or acquisition. Additionally, we could lose customers due to competitive pricing pressures or other reasons.

Our failure to compete successfully could make it difficult for us to add and retain customers and could reduce or impede the growth of our business.

We face competition from PPOs, TPAs and other managed healthcare companies. We believe that as managed care techniques continue to gain acceptance in the workers’ compensation marketplace, our competitors will increasingly consist of nationally-focused workers’ compensation managed care service companies, insurance companies, HMOs and other significant providers of managed care products. Legislative reform in some states has been considered, but not enacted to permit employers to designate health plans such as HMOs and PPOs to cover workers’ compensation claimants. Because many health plans have the ability to manage medical costs for workers’ compensation claimants, such legislation may intensify competition in the markets served by us. Many of our current and potential competitors are significantly larger and have greater financial and marketing resources than we do, and there can be no assurance that we will continue to maintain our existing customers, our past level of operating performance or be successful with any new products or in any new geographical markets we may enter.

Services

If the utilization by healthcare payors of early intervention services continues to increase, the revenue from our later-stage network and healthcare management services could be negatively affected.

The performance of early intervention services, including injury occupational healthcare, first notice of loss, and telephonic case management services, often result in a decrease in the average length of, and the total costs associated with, a healthcare claim. By successfully intervening at an early stage in a claim, the need for additional cost containment services for that claim often can be reduced or even eliminated. As healthcare payors continue to increase their utilization of early intervention services, the revenue from our later stage network and healthcare management services will decrease.

Declines in workers’ compensation claims may harm our results of operations.

Within the past few years, the economy has performed below historical averages which leads to fewer workers on a national level and could lead to fewer work related injuries. If declines in workers’ compensation costs occur in many states and persist over the long-term, it would have an adverse impact on our business, financial condition and results of operations.

We provide an outsource service to payors of workers’ compensation and auto healthcare benefits. These payors include insurance companies, TPAs, municipalities, state funds, and self-insured, self-administered employers. If these payors reduce the amount of work they outsource, our results of operations would be materially adversely affected.

Healthcare providers are becoming increasingly resistant to the application of certain healthcare cost containment techniques; this may cause revenue from our cost containment operations to decrease.

Healthcare providers have become more active in their efforts to minimize the use of certain cost containment techniques and are engaging in litigation to avoid application of certain cost containment practices. Recent litigation between healthcare providers and insurers has challenged certain insurers’ claims adjudication and reimbursement decisions. Although these lawsuits do not directly involve us or any services we provide, these cases may affect the use by insurers of certain cost containment services that we provide and may result in a decrease in revenue from our cost containment business.

Systems

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An interruption in our ability to access critical data may cause customers to cancel their service and/or may reduce our ability to effectively compete.

Certain aspects of our business are dependent upon our ability to store, retrieve, process and manage data and to maintain and upgrade our data processing capabilities. Interruption of data processing capabilities for any extended length of time, loss of stored data, programming errors or other system failures could cause customers to cancel their service and could have a material adverse effect on our business and results of operations.

In addition, we expect that a considerable amount of our future growth will depend on our ability to process and manage claims data more efficiently and to provide more meaningful healthcare information to customers and payors of healthcare. There can be no assurance that our current data processing capabilities will be adequate for our future growth, that we will be able to efficiently upgrade our systems to meet future demands, or that we will be able to develop, license or otherwise acquire software to address these market demands as well or as timely as our competitors.

A breach of security may cause our customers to curtail or stop using our services.

We rely largely on our own security systems, confidentiality procedures and employee nondisclosure agreements to maintain the privacy and security of our and our customers’ proprietary information. Accidental or willful security breaches or other unauthorized access by third parties to our information systems, the existence of computer viruses in our data or software and misappropriation of our proprietary information could expose us to a risk of information loss, litigation and other possible liabilities which may have a material adverse effect on our business, financial condition and results of operations. If security measures are breached because of third-party action, employee error, malfeasance or otherwise, or if design flaws in our software are exposed and exploited, and, as a result, a third party obtains unauthorized access to any customer data, our relationships with our customers and our reputation will be damaged, our business may suffer and we could incur significant liability. Because techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures.

Our Internet-based services are dependent on the development and maintenance of the Internet infrastructure.

The Internet has experienced a variety of outages and other delays as a result of damages to portions of its infrastructure, and it could face outages and delays in the future. These outages and delays could reduce the level of Internet usage, as well as the availability of the Internet to us for delivery of our Internet-based services. In addition, our customers who use our Web-based services depend on Internet service providers, online service providers and other Web site operators for access to our Web site. All of these providers have experienced significant outages in the past and could experience outages, delays and other difficulties in the future due to system failures unrelated to our systems. Any significant interruptions in our services or increases in response time could result in a loss of potential or existing users, and, if sustained or repeated, could reduce the attractiveness of our services.

If we are unable to leverage our information systems to enhance our outcome-driven service model, our results may be adversely affected.

To leverage our knowledge of workplace injuries, treatment protocols, outcomes data, and complex regulatory provisions related to the workers’ compensation market, we must continue to implement and enhance information systems that can analyze our data related to the workers’ compensation industry. We frequently upgrade existing operating systems and are updating other information systems that we rely upon in providing our services and financial reporting. We have detailed implementation schedules for these projects that require extensive involvement from our operational, technological and financial personnel. Delays or other problems we might encounter in implementing these projects could adversely affect our ability to deliver streamlined patient care and outcome reporting to our customers.

The introduction of software products incorporating new technologies and the emergence of new industry standards could render our existing software products less competitive, obsolete or unmarketable.

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There can be no assurance that we will be successful in developing and marketing new software products that respond to technological changes or evolving industry standards. If we are unable, for technological or other reasons, to develop and introduce new software products cost-effectively, in a timely manner and in response to changing market conditions or customer requirements, our business, results of operations and financial condition may be adversely affected.

Developing or implementing new or updated software products and services may take longer and cost more than expected. We rely on a combination of internal development, strategic relationships, licensing and acquisitions to develop our software products and services. The cost of developing new healthcare information services and technology solutions is inherently difficult to estimate. Our development and implementation of proposed software products and services may take longer than originally expected, require more testing than originally anticipated and require the acquisition of additional personnel and other resources. If we are unable to develop new or updated software products and services cost-effectively on a timely basis and implement them without significant disruptions to the existing systems and processes of our customers, we may lose potential sales and harm our relationships with current or potential customers.

Employment

The failure to attract and retain qualified or key personnel may prevent us from effectively developing, marketing, selling, integrating and supporting our services.

We are dependent, to a substantial extent, upon the continuing efforts and abilities of certain key management personnel. In addition, we face competition for experienced employees with professional expertise in the workers’ compensation managed care area. The loss of key personnel, especially V. Gordon Clemons, Chairman, and Dan Starck, President, Chief Executive Officer, and Chief Operating Officer, or the inability to attract, qualified employees, could have a material unfavorable effect on our business and results of operations.

We face competition for staffing, which may increase our labor costs and reduce profitability.

We compete with other healthcare providers in recruiting qualified management and staff personnel for the day-to-day operations of our business, including nurses and other case management professionals. In some markets, the scarcity of nurses and other medical support personnel has become a significant operating issue to healthcare providers. This shortage may require us to enhance wages to recruit and retain qualified nurses and other healthcare professionals. Our failure to recruit and retain qualified management, nurses and other healthcare professionals, or to control labor costs could have a material adverse effect on profitability.

General

There is a risk that the Company has not identified all the potential risk factors.

The Company has listed an extensive list of risk factors; however, the potential exists that there are more that the Company has not identified. These could be in any form and could affect the Company in an unfavorable manner. The Company is always aware of looking for other potential risk factors.

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Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds

There were no sales of unregistered securities during the period covered by this report. The following table shows the repurchases of the Company’s common stock made by or on behalf of the Company in open-market transactions for the quarter ended September 30, 2011 pursuant to a publicly announced plan.

Period	Total Number of Shares Purchased		Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced  Program		Maximum Number of Shares that may yet be Purchased Under  the Program
July 1 to July 31, 2011		40,356	$	49.03		40,356		390,951
August 1 to August 31, 2011		52,348		43.08		52,348		338,603
September 1 to September 30, 2011		47,968		43.73		47,968		290,635
Total		140,672	$	45.01		140,672		290,635

In 1996, the Company’s Board of Directors authorized a stock repurchase program for up to 100,000 shares of the Company’s common stock. The Company’s Board of Directors has periodically increased the number of shares authorized for repurchase under the repurchase program. The most recent increase occurred in May 2010 and brought the number of shares authorized for repurchase over the life of the program to 15,000,000 shares. There is no expiration date for the repurchase program. As of September 30, 2011, the Company had repurchased 14,709,365 shares of its common stock.

Item 3 — Defaults Upon Senior Securities — None.

Item 4 — (Removed and Reserved)

Item  5 — Other Information — None.

Item 6 — Exhibits

3.1 Amended and Restated Certificate of Incorporation of the Company. Incorporated herein by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2007 filed on August 9, 2007. 3.2 Amended and Restated Bylaws of the Company. Incorporated herein by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed on August 10, 2011.

3.3 Certification of Designation Increasing the Number of Shares of Series A Junior Participating Preferred Stock. Incorporated herein by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on November 24, 2008.

10.1 Second Amendment to Credit Agreement dated September 1, 2011 by and between CorVel Corporation and Wells Fargo Bank, National Association. Incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on August 31, 2011.

10.2 Revolving Line of Credit Note dated September 1, 2011 by CorVel Corporation in favor of Wells Fargo Bank, National Association. Incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on August 31, 2011.

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10.3 Restated Omnibus Incentive Plan (Formerly The Restated 1988 Executive Stock Option Plan), as amended. Incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on August 10, 2011.

31.1 Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2 Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1 Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith)

32.2 Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith)

Exhibit 101 The following materials from the Quarterly Report on Form 10-Q of the Company for the period ended September 30, 2011, filed with the SEC on November 4, 2011, formatted in Extensible Business Reporting Language (XBRL): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Cash Flows, and (iv) the Notes to Condensed Consolidated Financial Statements. Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

CORVEL CORPORATION
By:	/s/ Daniel J. Starck
Daniel J. Starck, President,
Chief Executive Officer, and
Chief Operating Officer
By:	/s/ Scott R. McCloud
Scott R. McCloud,
Chief Financial Officer

November 4, 2011

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EX-31.1

Exhibit 31.1

CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER

UNDER SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Daniel J. Starck, certify that:

1. I have reviewed this quarterly report on Form 10-Q of CorVel Corporation;

2. Based on my knowledge, this 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 report;

3. Based on my knowledge, the financial statements, and other financial information included in this 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 report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 4, 2011

/s/ DANIEL J. STARCK

Daniel J. Starck

Chief Executive Officer

(Principal Executive Officer)

EX-31.2

Exhibit 31.2

CERTIFICATION OF THE CHIEF FINANCIAL OFFICER

UNDER SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Scott R. McCloud, certify that:

1. I have reviewed this quarterly report on Form 10-Q of CorVel Corporation;

2. Based on my knowledge, this 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 report;

3. Based on my knowledge, the financial statements, and other financial information included in this 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 report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 4, 2011

/s/ SCOTT R. MCCLOUD

Scott R. McCloud

Chief Financial Officer

(Principal Financial Officer)

EX-32.1

Exhibit 32.1

This certification accompanies this report and is being furnished pursuant to Item 601(b)(32) of Regulation S-K promulgated under the Securities Act of 1933, as amended (the “Securities Act”) and the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. This certification shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed “filed” by the Registrant for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, or incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the Registrant specifically incorporates it by reference into such a filing.

CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER

UNDER SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of CorVel Corporation (the “Registrant”) on Form 10-Q for the period ended September 30, 2011 as filed with the Securities and Exchange Commission on the date hereof (the “Quarterly Report”), I, Daniel J. Starck, Chief Executive Officer of the Registrant, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my best knowledge:

(1) the Quarterly Report fully complies with the requirements of Section 13(a) or 15 (d) of the Securities Exchange Act of 1934; and

(2) the information contained in the Quarterly Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.

Date: November 4, 2011

/s/ DANIEL J. STARCK

Daniel J. Starck

Chief Executive Officer

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to CorVel Corporation and will be retained by CorVel Corporation and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.2

Exhibit 32.2

This certification accompanies this report and is being furnished pursuant to Item 601(b)(32) of Regulation S-K promulgated under the Securities Act of 1933, as amended (the “Securities Act”) and the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. This certification shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed “filed” by the Registrant for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, or incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the Registrant specifically incorporates it by reference into such a filing.

CERTIFICATION OF THE CHIEF FINANCIAL OFFICER

UNDER SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of CorVel Corporation (the “Registrant”) on Form 10-Q for the period ended September 30, 2011 as filed with the Securities and Exchange Commission on the date hereof (the “Quarterly Report”), I, Scott R. McCloud, Chief Financial Officer of the Registrant, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

(1) the Quarterly Report fully complies with the requirements of Section 13(a) or 15 (d) of the Securities Exchange Act of 1934; and

(2) the information contained in the Quarterly Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.

Date: November 4, 2011

/s/ SCOTT R. MCCLOUD

Scott R. McCloud

Chief Financial Officer

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to CorVel Corporation and will be retained by CorVel Corporation and furnished to the Securities and Exchange Commission or its staff upon request.

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Consolidated Balance Sheets (Parenthetical) (USD $)	Sep. 30, 2011	Mar. 31, 2011
Stockholders' Equity
Common stock, par value	$ 0.0001	$ 0.0001
Common stock, shares authorized	120,000,000	60,000,000
Common stock, shares outstanding	11,465,181	11,630,921
Common stock, shares issued	26,174,546	26,122,084
Treasury stock, shares	14,709,365	14,491,163

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Consolidated Income Statements (Unaudited) (USD $)	3 Months Ended		6 Months Ended
	Sep. 30, 2011	Sep. 30, 2010	Sep. 30, 2011	Sep. 30, 2010
Consolidated Income Statements [Abstract]
REVENUES	$ 104,552,000	$ 93,392,000	$ 206,860,000	$ 184,895,000
Cost of revenues	78,940,000	70,153,000	155,704,000	137,853,000
Gross profit	25,612,000	23,239,000	51,156,000	47,042,000
General and administrative expenses	12,592,000	14,171,000	24,886,000	25,657,000
Income before income tax provision	13,020,000	9,068,000	26,270,000	21,385,000
Income tax provision	5,139,000	1,535,000	10,191,000	6,092,000
NET INCOME	$ 7,881,000	$ 7,533,000	$ 16,079,000	$ 15,293,000
Net income per common and common equivalent share
Basic	$ 0.68	$ 0.64	$ 1.39	$ 1.28
Diluted	$ 0.68	$ 0.62	$ 1.37	$ 1.26
Weighted average common and common equivalent
Basic	11,526,000	11,861,000	11,572,000	11,909,000
Diluted	11,672,000	12,104,000	11,729,000	12,145,000

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Document and Entity Information (USD $)	6 Months Ended
	Sep. 30, 2011	Nov. 01, 2011	Sep. 30, 2010
Document and Entity Information [Abstract]
Entity Registrant Name	CORVEL CORP
Entity Central Index Key	0000874866
Document Type	10-Q
Document Period End Date	Sep. 30, 2011
Amendment Flag	false
Document Fiscal Year Focus	2012
Document Fiscal Period Focus	Q2
Current Fiscal Year End Date	--03-31
Entity Well-known Seasoned Issuer	No
Entity Voluntary Filers	No
Entity Current Reporting Status	Yes
Entity Filer Category	Accelerated Filer
Entity Public Float			$ 276,324,000
Entity Common Stock, Shares Outstanding		11,433,492

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Line of Credit

6 Months Ended

Sep. 30, 2011

Line of Credit [Abstract]

Line of Credit

Note G — Line of Credit

In September 2011, the Company renewed a credit agreement that had been in place throughout fiscal 2011 and the six months ended September 30, 2011. The line is with a financial institution to provide a revolving credit facility with borrowing capacity of up to $10 million. Borrowings under this agreement, as amended, bear interest, at the Company’s option, at a fixed LIBOR-based rate plus 1.50% or at a fluctuating rate determined by the financial institution to be 1.50% above the daily one-month LIBOR rate. The loan covenants require the Company to maintain the current assets to liabilities ratio of at least 1.25:1, debt to tangible net worth not greater than 1.25:1 and have positive net income. There were no outstanding revolving loans at any time during fiscal 2011 or the six months ended September 30, 2011, or as of the date hereof, but letters of credit in the aggregate amount of $8.0 million have been issued separate from the line of credit and therefore do not reduce the amount of borrowings available under the revolving credit facility. The renewed credit agreement expires in September 2012.

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Treasury Stock and Subsequent Event

6 Months Ended

Sep. 30, 2011

Treasury Stock and Subsequent Event [Abstract]

Treasury Stock and Subsequent Event

Note C — Treasury Stock and Subsequent Event

The Company’s Board of Directors initially approved the commencement of a share repurchase program in the fall of 1996. In May 2010, the Board approved an 850,000 share expansion of the repurchase program to 15,000,000 shares over the life of the share repurchase program. Since the commencement of the share repurchase program, the Company has spent $259 million to repurchase 14,709,365 shares of its common stock, equal to 56% of the outstanding common stock had there been no repurchases. The average price of these repurchases is $17.60 per share. These purchases have been funded primarily from the net earnings of the Company, along with the proceeds from the exercise of common stock options. During the three and six months ended September 30, 2011, the Company repurchased 140,672 shares for $6.3 million, and 218,202 shares for $10.0 million, respectively. The Company had 11,465,181 shares of common stock outstanding as of September 30, 2011, net of the 14,709,365 shares in treasury. Subsequent to the end of the quarter, through October 25, 2011, the Company repurchased 45,668 shares of common stock for $2.20 million or $48.15 average price per share.

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Contingencies and Litigation

6 Months Ended

Sep. 30, 2011

Contingencies and Litigation [Abstract]

Contingencies and Litigation

Note H — Contingencies and Litigation

On March 25, 2011, George Raymond Williams, MD. (“Williams”), as plaintiff, individually and on behalf of those similarly situated, filed a First Amended and Restated Petition for Damages and Class Certification in the 27 ^th Judicial District Court, Parish of St. Landry, Louisiana, against CorVel Corporation (“CorVel”) and its insurance carriers, Homeland Insurance Company of New York and Executive Risk Specialty Insurance Company and several other unrelated parties. Williams alleges that CorVel violated Louisiana’s Any Willing Provider Act (the “AWPA”), which requires a payor accessing a preferred provider contract to give 30 days’ advance written notice or point of service notice in the form of a benefit card before the payor accesses the discounted rates in the contract to pay the provider for services rendered to an insured under that payor’s health benefit plan.

On March 31, 2011, CorVel entered into a Memorandum of Understanding with attorneys representing the plaintiffs and the class setting forth the terms of settlement of this class action lawsuit. The Memorandum of Understanding provides that subject to the execution of a mutually acceptable settlement agreement and final non-appealable approval of such settlement by the Louisiana state court, CorVel will pay $9 million to resolve claims for which CorVel recorded a $9 million pre-tax charge to earnings during the March 2011 quarter. In addition, CorVel will assign to the class certain rights it has to the proceeds of CorVel’s insurance policies relating to the claims asserted by the class. The class action arbitration filed with the American Arbitration Association against CorVel in December 2006 by Southwest Louisiana Hospital Association dba Lake Charles Memorial Hospital as previously disclosed by CorVel is encompassed within the settlement terms of the Memorandum of Understanding. Pursuant to the Memorandum of Understanding, the parties have also agreed to request that the appropriate courts stay all related proceedings in State and Federal Court, as well as the Louisiana Office of Workers Compensation and the arbitration proceeding before the American Arbitration Association in which the parties are named, until the settlement agreement is prepared, executed and receives final court approval. The settlement does not constitute an admission of liability.

On June 23, 2011 CorVel and class counsel executed a definitive settlement agreement. The settlement agreement contains the same terms and conditions as were set forth in the Memorandum of Understanding. Accordingly, CorVel made a $9 million cash payment into escrow on July 6, 2011. As set forth in the settlement agreement, certain contingencies such as preliminary court approval, resolutions of objections filed by class members challenging the fairness of the settlement, class members excluded from the settlement not exceeding a materiality threshold, and final court approval, must be satisfied before the settlement become final.

On June 23, 2011, the 27 ^th Judicial District Court for the Parish of St. Landry, Louisiana granted preliminary approval of settlement. Notice of the settlement is being given to Class Members. The Court has set a deadline of October 16, 2011 for parties to opt out of or object to the proposed settlement. The Court has set the hearing for final approval on November 4, 2011.

In exchange for the settlement payment by CorVel, class members will release CorVel and all of its affiliates and clients for any claims relating in any way to re-pricing, payment for, or reimbursement of a workers’ compensation bill, including but not limited to claims under the AWPA. Plaintiffs have also agreed to a notice procedure that CorVel may follow in the future to comply with the AWPA. As noted, the Memorandum of Understanding is contingent upon the execution of a mutually acceptable definitive settlement agreement. Under Louisiana law, once the parties have executed such a settlement agreement, they must apply to the court for approval of the settlement following a court-supervised process of notice to the class and an opportunity for the class to be heard about the fairness of the settlement or to be excluded from the settlement. CorVel expects to be able to arrive at such a definitive settlement agreement by the end of December 2011, but there can be no assurance that the parties will be able to reach a definitive settlement agreement within that timeframe or at all, that the court will approve the settlement or that a large number of class members will not opt out of the settlement. If a definitive settlement agreement is not reached or is not approved by the court, all related proceedings in State and Federal Court, as well as the Louisiana Office of Workers Compensation and the arbitration proceeding before the American Arbitration Association that have been stayed pending settlement will resume.

In February 2005, Kathleen Roche, D.C., as plaintiff, filed a putative class action in Circuit Court for the 20th Judicial District, St. Clair County, Illinois, against the Company. The case sought unspecified damages based on the Company’s alleged failure to direct patients to medical providers who were members of the CorVel CorCare PPO network and also alleged that the Company used biased and arbitrary computer software to review medical providers’ bills. On October 29, 2010, the Company entered into a settlement agreement providing for the payment of $2.1 million to class members and up to an additional $700,000 for attorneys’ fees and expenses, and as a result the Company accrued $2.8 million of estimated liability for this settlement agreement during the quarter ended September 30, 2010. Initial payments were sent to class members on July 18, 2011. The Company denies that its conduct was improper in any way and has denied all liability. In exchange for the settlement payment by the Company, class members consisting of Illinois medical providers (excluding hospitals) have released the Company and all of its affiliates for claims relating to any PPO or usual and customary reductions recommended by the Company on class members’ medical bills. On January 21, 2011, the Circuit Court gave final approval to the settlement and awarded class counsel $700,000 in attorneys’ fees and expenses and a $5,000 incentive award to Kathleen Roche, the class representative.

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

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Basis of Presentation and Summary of Significant Accounting Policies

6 Months Ended

Sep. 30, 2011

Basis of Presentation and Summary of Significant Accounting Policies [Abstract]

Basis of Presentation and Summary of Significant Accounting Policies

Note A — Basis of Presentation and Summary of Significant Accounting Policies

The unaudited financial statements herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. The accompanying interim financial statements have been prepared under the presumption that users of the interim financial information have either read or have access to the audited financial statements for the latest fiscal year ended March 31, 2011. Accordingly, footnote disclosures which would substantially duplicate the disclosures contained in the March 31, 2011 audited financial statements have been omitted from these interim financial statements.

In accordance with ASU 2010-09, the Company evaluated all subsequent events or transactions. During the period subsequent to September 30, 2011, the Company repurchased 45,668 shares for $2.20 million or $48.15 average price per share. These shares were repurchased under the Company’s ongoing share repurchase program described in Note C.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for the three and six months ended September 30, 2011 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2012. For further information, refer to the consolidated financial statements and footnotes for the fiscal year ended March 31, 2011 included in the Company’s Annual Report on Form 10-K.

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 compliance 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. Significant estimates include the values assigned to intangible assets, capitalized software development, the allowance for doubtful accounts, accrual for income taxes, purchase price allocation for acquisitions, accrual for self-insurance reserves, share-based payments related to performance based awards, loss contingencies, estimated claims for claims administration revenue recognition, and estimates used in stock option valuations.

Recent Accounting Pronouncements: In September 2011, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance allowing entities testing goodwill for impairment to perform a qualitative assessment to determine whether further impairment testing is necessary. If entities determine, on the basis of qualitative factors, that it is more likely than not that a reporting unit’s fair value is greater than the carrying amount, a quantitative calculation may not be needed. This update is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Adoption of the standard is not expected to have a material impact on our financial position, results of operations, or cash flows.

Cash and Cash Equivalents: Cash and cash equivalents consist of short-term highly-liquid investment-grade interest-bearing securities with maturities of 90 days or less when purchased.

Fair Value of Financial Instruments: The Company applies ASC 820, “Fair Value Measurements and Disclosures” with respect to fair value measurements of (a) nonfinancial assets and liabilities that are recognized or disclosed at fair value in the Company’s Consolidated Financial Statements on a recurring basis (at least annually) and (b) all financial assets and liabilities. ASC 820 prioritizes the inputs used in measuring fair value into the following hierarchy:

Level 1 Quoted market prices in active markets for identical assets or liabilities;

Level 2 Observable inputs other than those included in Level 1 (for example, quoted prices for similar assets in active markets or quoted prices for identical assets in inactive markets); and

Level 3 Unobservable inputs reflecting management’s own assumptions about the inputs used in estimating the value of the asset.

The carrying amount of the Company’s financial instruments (i.e. cash, accounts receivable, accounts payable, etc.) are all Level 1 and approximate their fair values at March 31, 2011 and September 30, 2011. The Company has no Level 2 or Level 3 assets.

Goodwill: The Company accounts for its business combinations in accordance with FASB ASC 805-10 through ASC 805-50 Business Combinations which requires that the purchase method of accounting be applied to all business combinations and addresses the criteria for initial recognition of intangible assets and goodwill. In accordance with FASB ASC 350-10 through ASC 350-30, goodwill and other intangible assets with indefinite lives are not amortized but are tested for impairment annually, or more frequently if circumstances indicate the possibility of impairment. If the carrying value of goodwill or an intangible asset exceeds its fair value, an impairment loss shall be recognized. The Company’s goodwill impairment test is conducted company-wide and the fair value is compared to its carrying value. The measurement of fair value is based on an evaluation of market capitalization and is further tested using a multiple of earnings approach. For all periods presented, no material impairment existed and, accordingly, no loss was recognized.

Revenue Recognition: The Company recognizes revenue when there is persuasive evidence of an arrangement, the services have been provided to the customer, the sales price is fixed or determinable, and collectability is reasonably assured. For the Company’s services, as the Company’s professional staff performs work, they are contractually permitted to bill for fees earned in fraction of an hour increments worked or by units of production. The Company recognizes revenue as the time is worked or as units of production are completed, which is when the revenue is earned and realized. Labor costs are recognized as the costs are incurred. The Company derives the majority of its revenue from the sale of Network Solutions and Patient Management services. Network Solutions and Patient Management services may be sold individually or combined with any of the services the Company provides. When a sale combines multiple elements, the Company accounts for multiple element arrangements in accordance with the guidance included in ASC 605-25.

In accordance with ASC 605-25, the Company allocates revenue for transactions or collaborations that include multiple elements to each unit of accounting based on its relative fair value, and recognizes revenue for each unit of accounting when the revenue recognition criteria have been met. The price charged when the element is sold separately generally determines fair value. When our customers purchase several products from CorVel, the pricing of the products sold is generally the same as if the product were sold on an individual basis. As a result, the fair value of each product sold in a multiple element arrangement is almost always determinable. The Company recognizes revenue for delivered elements when the delivered elements have standalone value and the Company has objective and reliable evidence of fair value for each undelivered element. If the fair value of any undelivered element included in a multiple element arrangement cannot be objectively determined, revenue is deferred until all elements are delivered and services have been performed, or until fair value can objectively be determined for any remaining undelivered elements. Based upon the nature of our products, bundled products are generally delivered in the same accounting period.

The FASB issued Accounting Standards Update No. 2009-13, Multiple Deliverable Revenue Arrangements — a consensus of FASB Emerging Issues Task Force (“ASU 2009-13”). ASU 2009-13 provides for less restrictive separation criteria that must be met for a deliverable to be considered a separate unit of accounting. Additionally, under this Standard, there is a hierarchy for determining the selling price of a unit of accounting and consideration must be allocated using a relative-selling price method. ASU 2009-13 was be effective for CorVel Corporation on April 1, 2011. We reviewed the requirements of ASU 2009-13 and determined the pronouncement had no material impact on our financial position or results of operations.

Accounts Receivable: The majority of the Company’s accounts receivable are due from companies in the property and casualty insurance industries, self-insured employers, and government entities. Accounts receivable are due within 30 days and are stated as amounts due from customers net of an allowance for doubtful accounts. Those accounts outstanding longer than the contractual payment terms are considered past due. The Company determines its allowance by considering a number of factors, including the length of time trade accounts receivable are past due, the Company’s previous loss history, the customer’s current ability to pay its obligation to the Company and the condition of the general economy and the industry as a whole. No one customer accounted for 10% or more of accounts receivable at either March 31, 2011 or September 30, 2011. No one customer accounted for 10% or more of revenue during either of the three or six month periods ended September 30, 2010 or 2011.

Property and Equipment: Additions to property and equipment are recorded at cost. Depreciation and amortization are provided using the straight-line method over the estimated useful lives of the related assets, which range from one to seven years. The Company accounts for internally developed software costs in accordance with FASB ASC 350-40, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use, which allows for the capitalization of software developed for internal use. 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.

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. The balance of the unrecognized tax benefits as of March 31, 2011 and September 30, 2011 was $1,608,000 and $1,529,000, respectively.

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 decreased in the September 2011 quarter compared to the same quarter of the prior year primarily due to repurchase of shares under the Company’s share repurchase program. See also Note D.

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Weighted Average Shares and Net Income Per Share

6 Months Ended

Sep. 30, 2011

Weighted Average Shares and Net Income Per Share [Abstract]

Weighted Average Shares and Net Income Per Share

Note D — Weighted Average Shares and Net Income Per Share

Weighted average basic common and common equivalent shares decreased from 11,861,000 for the quarter ended September 30, 2010 to 11,526,000 for the quarter ended September 30, 2011. Weighted average diluted common and common equivalent shares decreased from 12,104,000 for the quarter ended September 30, 2010 to 11,672,000 for the quarter ended September 30, 2011. The net decrease in both of these weighted share calculations is due to the repurchase of common stock as noted above, offset by an increase in shares outstanding due to the exercise of stock options under the Company’s employee stock option plan.

Net income per common and common equivalent shares was computed by dividing net income by the weighted average number of common and common stock equivalents outstanding during the quarter. The calculations of the basic and diluted weighted shares for the three months ended September 30, 2010 and 2011, are as follows:

	Three Months Ended September 30,
	2010		2011
Net Income	$	7,533,000	$	7,881,000
Basic:
Weighted average common shares outstanding		11,861,000		11,526,000
Net Income per share	$	0.64	$	0.68
Diluted:
Weighted average common shares outstanding		11,861,000		11,526,000
Treasury stock impact of stock options		243,000		146,000
Total common and common equivalent shares		12,104,000		11,672,000
Net Income per share	$	0.62	$	0.68

	Six Months Ended September 30,
	2010		2011
Net Income	$	15,293,000	$	16,079,000
Basic:
Weighted average common shares outstanding		11,909,000		11,572,000
Net Income per share	$	1.28	$	1.39
Diluted:
Weighted average common shares outstanding		11,909,000		11,572,000
Treasury stock impact of stock options		236,000		157,000
Total common and common equivalent shares		12,145,000		11,729,000
Net Income per share	$	1.26	$	1.37

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Shareholder Rights Plan

6 Months Ended

Sep. 30, 2011

Shareholder Rights Plan [Abstract]

Shareholder Rights Plan

Note E — Shareholder Rights Plan

During fiscal 1997, the Company’s Board of Directors approved the adoption of a Shareholder Rights Plan. The Shareholder Rights Plan provides for a dividend distribution to CorVel stockholders of one preferred stock purchase right for each outstanding share of CorVel’s common stock under certain circumstances. In November 2008, the Company’s Board of Directors approved an amendment to the Shareholder Rights Plan to extend the expiration date of the rights to February 10, 2022, and set the exercise price of each right at $118.

The rights are designed to assure that all shareholders 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 $118 per right, subject to subsequent adjustment. The rights trade with the Company’s common stock and will not be exercisable until the occurrence of certain takeover-related events.

Generally, the Shareholder Rights Plan provides that if a person or group acquires 15% or more of the Company’s common stock without the approval of the Board, subject to certain exceptions, the holders of the rights, other than the acquiring person or group, would, under certain circumstances, have the right to purchase additional shares of the Company’s common stock having a market value equal to two times the then-current exercise price of the right.

In addition, if the Company is thereafter merged into another entity, or if 50% or more of the Company’s consolidated assets or earning power are sold, then the right will entitle its holder to buy common shares of the acquiring entity having a market value equal to two times the then-current exercise price of the right. The Company’s Board of Directors may exchange or redeem the rights under certain conditions.

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Other Intangible Assets

6 Months Ended

Sep. 30, 2011

Other Intangible Assets [Abstract]

Other Intangible Assets

Note F — Other Intangible Assets

Other intangible assets consist of the following at September 30, 2011:

Item	Life		Cost		Six Months Ended September 30, 2011 Amortization Expense		Accumulated Amortization at September 30, 2011		Cost, Net of Accumulated Amortization at September 30, 2011
Covenants Not to Compete		5 Years	$	775,000	$	78,000	$	592,000	$	183,000
Customer Relationships		18-20 Years		7,922,000		212,000		1,820,000		6,102,000
TPA Licenses		15 Years		204,000		6,000		56,000		148,000
Total			$	8,901,000	$	296,000	$	2,468,000	$	6,433,000

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Consolidated Statements of Cash Flows (Unaudited) (USD $)	6 Months Ended
	Sep. 30, 2011	Sep. 30, 2010
Cash flows from Operating Activities
NET INCOME	$ 16,079,000	$ 15,293,000
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	6,987,000	5,947,000
Loss on disposal of assets	116,000	111,000
Stock compensation expense	1,329,000	1,264,000
Write-off of uncollectible accounts	1,305,000	1,087,000
Changes in operating assets and liabilities
Accounts receivable	(3,167,000)	(1,459,000)
Customer deposits	433,000	(609,000)
Prepaid taxes and expenses	(191,000)	2,844,000
Other assets	0	19,000
Accounts and taxes payable	3,366,000	(974,000)
Accrued liabilities	(9,923,000)	1,163,000
Deferred income tax	(461,000)	(810,000)
Net cash provided by operating activities	15,873,000	23,876,000
Cash Flows from Investing Activities
Purchase of property and equipment	(11,658,000)	(9,032,000)
Net cash (used in) investing activities	(11,658,000)	(9,032,000)
Cash Flows from Financing Activities
Purchase of treasury stock	(10,005,000)	(11,778,000)
Tax effect of stock option exercises	973,000	1,027,000
Exercise of common stock options	525,000	1,952,000
Exercise of employee stock purchase options	157,000	160,000
Net cash (used in) financing activities	(8,350,000)	(8,639,000)
Increase in cash and cash equivalents	(4,135,000)	6,205,000
Cash and cash equivalents at beginning of period	12,269,000	10,242,000
Cash and cash equivalents at end of period	8,134,000	16,447,000
Supplemental Cash Flow Information:
Income taxes paid	7,288,000	6,165,000
Purchase of software license under finance agreement	$ 861,000	$ 1,700,000

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Stock Based Compensation and Stock Options

6 Months Ended

Sep. 30, 2011

Stock Based Compensation and Stock Options [Abstract]

Stock Based Compensation and Stock Options

Note B — Stock Based Compensation and Stock Options

Under the Company’s Restated Omnibus Incentive Plan (Formerly The Restated 1988 Executive Stock Option Plan) (“the Plan”) as in effect at September 30, 2011, options for up to 9,682,500 shares of the Company’s common stock may be granted to key employees, non-employee directors and consultants at exercise prices not less than the fair market value of the stock at the date of grant. Options granted under the Plan are non-statutory stock options and generally vest 25% one year from date of grant and the remaining 75% vesting ratably each month for the next 36 months. The options granted to employees and the board of directors expire at the end of five years and ten years from date of grant, respectively.

The Company records compensation expense for employee stock options based on the estimated fair value of the options on the date of grant using the Black-Scholes option-pricing model with the assumptions included in the table below. The Company uses historical data among other factors to estimate the expected volatility, the expected option life, and the expected forfeiture rate. The risk-free rate is based on the interest rate paid on a U.S. Treasury issue with a term similar to the estimated life of the option. Based upon the historical experience of options cancellations, the Company has estimated an annualized forfeiture rate of 9.27% and 9.36% for the three months ended September 30, 2010 and 2011, respectively. Forfeiture rates will be adjusted over the requisite service period when actual forfeitures differ, or are expected to differ, from the estimate. The following assumptions were used to estimate the fair value of options granted during the three months ended September 30, 2010 and 2011 using the Black-Scholes option-pricing model:

	Three Months Ended September  30,
	2010			2011
Risk-free interest rate		2.15	%		1.13	%
Expected volatility		46	%		47	%
Expected dividend yield		0.00	%		0.00	%
Expected forfeiture rate		9.27	%		9.36	%
Expected weighted average life of option in years		4.7 years			4.7 years

All options granted in the six months ended September 30, 2010 and 2011 were granted at fair market value and are non-statutory stock options.

In May 2006, the Company’s Board of Directors granted performance-based stock options for 149,175 shares of common stock at fair market value at the date of grant, which would only vest if the Company attained certain earnings per share targets, as established by the Company’s Board of Directors, for calendar years 2008, 2009, and 2010. These options were granted with an exercise price of $15.76 per share, which was the fair market value at the date of grant, and have a valuation of $6.75 per share. The Company did not attain the targets for calendar years 2008 and 2009. The Company attained the earnings per share target for calendar year 2010 which allowed for options for 68,025 shares to vest. The Company recognized $413,000 in stock compensation expense in fiscal 2011, and $459,000, cumulatively, for these options. No further stock options will vest under this grant and there will be no further recognition of stock compensation expense.

In February 2008, the Company’s Board of Directors granted performance-based stock options for 42,000 shares of common stock at fair market value at the date of grant, which will only vest if the Company attains certain revenue targets for all services sold to claims administration clients and out-of-network bill review revenues, as established by the Company’s Board of Directors, for calendar years 2009, 2010, and 2011. The targets for the various options varied by the regions managed by these optionees with each region having a different target. These options were granted with an exercise price of $25.10 per share, which was the fair market value at the date of grant, and have a valuation of $9.81 per share. Currently, management has determined that optionees with 12,000 options attained the revenue targets for calendar year 2009 and 2010, and, accordingly, the Company has recognized $33,000 during fiscal 2011, $11,000 during the quarter ended September 30, 2011, $22,000 during the six months ended September 30, 2011, and $105,000, cumulatively, since the date of the option grant. Currently, management has determined that it is not probable that the revenue targets for the remaining optionees will be attained and, accordingly, the Company has recognized no stock compensation expense for those options.

In February 2009, the Company’s Board of Directors granted performance-based stock options for 100,000 shares of common stock at fair market value at the date of grant, which will only vest if the Company attains certain earnings per share targets, as established by the Company’s Board of Directors, for calendar years 2009, 2010, and 2011. Net of cancelations due to employee terminations, options for 95,000 shares remained under these performance-based stock options as of September 30, 2011. These options were granted with an exercise price of $19.79 per share, which was the fair market value at the date of grant, and have a valuation of $8.21 per share. The Company attained these targets for calendar 2009 and 2010, expects to attain the target for calendar year 2011, and, accordingly, the Company recognized stock compensation expense of $221,000 during fiscal year 2011, $78,000 during the quarter ended September 30, 2011, $156,000 for the six months ended September 30, 2011, and $702,000, cumulatively, since the date of the option grants.

In February 2009, the Company’s Board of Directors granted performance-based stock options for 10,000 shares of common stock at fair market value at the date of grant, which will only vest if the Company attains certain revenue targets for all services sold to claims administration clients and out-of-network bill review revenues, as established by the Company’s Board of Directors, for calendar years 2009, 2010, and 2011. These options were granted with an exercise price of $20.37 per share, which was the fair market value at the date of grant, and have a valuation of $8.45 per share. The Company did not achieve the revenue target for calendar year 2009 or 2010. Currently, management has determined that it is not probable that the Company will attain the revenue targets for calendar year 2011, and, accordingly, the Company has recognized no stock compensation expense for this stock option grant during fiscal 2011 or the three or six months ended September 30, 2011.

In November 2009, the Company’s Board of Directors granted performance-based stock options for 110,000 shares of common stock at fair market value at the date of grant, which will only vest if the Company attains certain earnings per share targets, as established by the Company’s Board of Directors, for calendar years 2010, 2011, and 2012. These options were granted with an exercise price of $28.92 per share, which was the fair market value at the date of grant, and have a valuation of $12.57 per share. The Company attained the earnings per share target in calendar year 2010, and currently, management has determined that it is probable that the Company will attain the earnings per share targets for calendar year 2011. Accordingly, the Company recognized $337,000 of stock compensation expense for this stock option grant during fiscal 2011, $104,000 for the three months ended September 30, 2011, $208,000 for the six months ended September 30, 2011, and $726,000, cumulatively.

In December 2010, the Company’s Board of Directors granted performance-based stock options for 100,000 shares of common stock at fair market value at the date of grant, which will only vest if the Company attains certain earnings per share targets, as established by the Company’s Board of Directors, for calendar years 2011, 2012, and 2013. These options were granted with an exercise price of $46.14 per share, which was the fair market value at the date of grant, and have a valuation of $18.72 per share. Management has determined that it is probable that the Company will attain the earnings per share targets for calendar year 2011. Accordingly, the Company has recognized $140,000 of stock compensation expense for this stock option grant during fiscal 2011, $140,000 during the three months ended September 30, 2011, $280,000 for the six months ended September 30, 2011 and $421,000, cumulatively.

The table below shows the amounts recognized in the financial statements for stock compensation expense for time based options and performance based options the three and six months ended September 30, 2010 and 2011, respectively. Included in the three months and six months ended September 30, 2011 stock compensation expense is $334,000 and $668,000, respectively, for the expense related to the performance based options.

	Three Months Ended
	September 30, 2010			September 30, 2011
Cost of revenues	$	147,000		$	125,000
General and administrative		526,000			546,000
Total cost of stock-based compensation included in		673,000			671,000
income before income tax provision
Amount of income tax benefit recognized		(256,000	)		(262,000	)
Amount charged against net income	$	417,000		$	409,000
Effect on diluted net income per share	$	(0.03	)	$	(0.04	)

	Six Months Ended
	September 30, 2010			September 30, 2011
Cost of revenues	$	281,000		$	250,000
General and administrative		983,000			1,079,000
Total cost of stock-based compensation included in		1,264,000			1,329,000
income before income tax provision
Amount of income tax benefit recognized		(474,000	)		(520,000	)
Amount charged against income	$	790,000		$	809,000
Effect on diluted income per share	$	(0.07	)	$	(0.07	)

Summarized information for all stock options for the three months and six months ended September 30, 2010 and 2011 follows:

	Three Months Ended September 30, 2010					Three Months Ended September 30, 2011
	Shares			Average Price		Shares			Average Price
Options outstanding, beginning		1,079,022		$	23.35		797,377		$	29.87
Options granted		45,000			39.06		29,550			43.73
Options exercised		(95,317	)		17.94		(26,429	)		23.51
Options cancelled		(1,266	)		16.81		(1,625	)		25.31
Options outstanding, ending		1,027,439		$	24.55		798,873		$	30.62

	Six Months Ended September 30, 2010					Six Months Ended September 30, 2011
	Shares			Average Price		Shares			Average Price
Options outstanding, beginning		1,065,403		$	22.57		813,622		$	29.26
Options granted		93,000			37.76		45,225			45.75
Options exercised		(129,538	)		17.77		(54,973	)		23.17
Options cancelled		(1,426	)		20.85		(5,001	)		28.20
Options outstanding, ending		1,027,439		$	24.55		798,873		$	30.62

The following table summarizes the status of stock options outstanding and exercisable at September 30, 2011:

Range of Exercise Price	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
$15.55 to $23.55		200,964		2.65	$	19.39		152,052	$	19.17
$24.75 to $28.92		254,669		2.80	$	27.04		140,437	$	26.62
$28.92 to $43.73		212,415		4.11	$	35.69		92,553	$	33.06
$46.00 to $49.56		130,825		4.20	$	46.59		1,175	$	47.70
Total		798,873		3.34	$	30.62		386,217	$	25.29

A summary of the status for all outstanding options at September 30, 2011, and changes during the three months then ended, is presented in the table below:

	Number of Options			Weighted Average Exercise Per Share		Weighted Average Remaining Contractual Life (Years)		Aggregate Intrinsic Value as of September 30, 2011
Options outstanding at July 1, 2011		797,377		$	29.89
Granted		29,550			43.73
Exercised		(26,429	)		23.51
Cancelled – forfeited		(1,100	)		28.75
Cancelled – expired		(525	)		18.09
Ending outstanding		798,873		$	30.62		3.34	$	10,062,545
Ending vested and expected to vest		735,700		$	29.91		3.27	$	9,706,495
Ending exercisable at September 30, 2011		386,217		$	25.29		2.72	$	6,651,753

The weighted-average grant-date fair value of options granted during the three months ended September 30, 2010 and 2011, was $16.28 and $17.59, respectively.

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Consolidated Balance Sheets (USD $)	Sep. 30, 2011	Mar. 31, 2011
Current Assets
Cash and cash equivalents (Note A)	$ 8,134,000	$ 12,269,000
Customer deposits	4,846,000	5,279,000
Accounts receivable, net	50,826,000	48,964,000
Prepaid taxes and expenses	6,608,000	6,417,000
Deferred income taxes	9,759,000	9,298,000
Total current assets	80,173,000	82,227,000
Property and equipment, net	43,351,000	38,500,000
Goodwill	36,769,000	36,769,000
Other intangibles, net (Note F)	6,433,000	6,729,000
TOTAL ASSETS	166,726,000	164,225,000
Current Liabilities
Accounts and taxes payable	17,956,000	14,590,000
Accrued liabilities	30,325,000	40,248,000
Total current liabilities	48,281,000	54,838,000
Deferred income taxes	9,748,000	9,748,000
Commitments and contingencies (Note G and H)
Stockholders' Equity
Common stock, $.0001 par value: 60,000,000 shares authorized at March 31, 2011 and 120,000,000 shares authorized at September 30, 2011; 26,122,084 shares issued (11,630,921 shares outstanding, net of Treasury shares) and 26,174,546 shares issued (11,465,181 shares outstanding, net of Treasury shares) at March 31, 2011 and September 30, 2011, respectively	3,000	3,000
Paid-in capital	103,057,000	100,073,000
Treasury Stock (14,491,163 shares at March 31, 2011 and; 14,709,365 shares at September 30, 2011)	(258,936,000)	(248,931,000)
Retained earnings	264,573,000	248,494,000
Total stockholders' equity	108,697,000	99,639,000
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$ 166,726,000	$ 164,225,000