UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

For the fiscal year ended December 31, 2004

For the transition period from ______ to ________

Commission File Number: 0-50194

HMS HOLDINGS CORP.

(212) 725-7965
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
(Title of Class)

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

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

          Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes þ  No o

          Aggregate market value of voting stock held by non-affiliates as of June 30, 2004 was $110 million.

          The approximate aggregate market value of the registrant’s common stock, $0.01 par value, held by non-affiliates (based on the last reported sales price on the Nasdaq National Market) was $157.5 million at March 25, 2005.

          The number of shares common stock, $0.01 par value, outstanding as of March 25, 2005 was 19,491,384.

DOCUMENTS INCORPORATED BY REFERENCE

HMS HOLDINGS CORP. AND SUBSIDIARIES

ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS

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Special Note Regarding Forward-Looking Statements

          This Annual Report on Form 10-K contains “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. For this purpose any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words “believes,” “anticipates,” “plans,” “expects” and similar expressions are intended to identify forward-looking statements. These statements involve unknown risks, uncertainties and other factors, which may cause our actual results to differ materially, form those implied by the forward looking statements. Among the important factors that could cause actual results to differ materially from those indicated by such forward-looking statements include those risks identified in “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Factors” and other risks identified in this Form 10-K and presented elsewhere by management from time to time. Such forward-looking statements represent management’s current expectations and are inherently uncertain. Investors are warned that actual results may differ from management’s expectations.

PART I

Item 1. Business

Overview

          HMS Holdings Corp. furnishes cost containment, revenue recovery, cost reporting and business office outsourcing services to healthcare providers and payors. We help our clients increase revenue, accelerate collections, and reduce operating and administrative costs. We operate two businesses through our wholly owned subsidiaries, Health Management Systems, Inc. (Health Management Systems) and Accordis Inc. (Accordis).

          Health Management Systems works on behalf of government healthcare programs to contain costs by recovering expenditures that were the responsibility of a third party, or that were paid inappropriately. Health Management Systems’ clients include state and county Medicaid programs, their managed care plans, child support enforcement agencies, state prescription drug programs and other public programs.

          Accordis provides business office outsourcing services for hospitals, emergency medical transport agencies, and other healthcare providers. These business office services may include identifying third-party resources, submitting timely and accurate bills to third-party payors and patients, recovering and properly accounting for the amounts due, responding to customer service questions from patients, and securing the appropriate cost-based reimbursement from entitlement programs. Clients may outsource the entirety of their business office operations to us, or discrete components of the revenue cycle.

          On March 7, 2005, we announced that we had commenced a strategic review of all of the alternatives available to us for increasing the return on the resources we employ in delivering services to providers through our Accordis subsidiary.

          Subsequent to the issuance of our press release on March 7, 2005 announcing the results of operations for the fourth quarter and year ended December 31, 2004, the following items were recorded:

(1)

We reclassified $22.5 million of municipal auction rate securities as short-term marketable securities, which were previously disclosed as cash and cash equivalents. This change in classification had no effect on the amounts of total current assets, total assets, net income or cash flow from operations.

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	(2)	On March 8, 2005, we received $2.4 million in settlement of two accounts receivable from the District of Columbia and also recognized contingent recovery fees and settlement expenses approximating $0.7 million resulting from the settlement. Although this settlement was negotiated and received subsequent to December 31, 2004, we reflected it in the 2004 results of operations as the subsequent settlement of this litigation eliminated the need for a bad debt allowance against these accounts receivable at December 31, 2004. Accordingly, we adjusted accounts receivable at December 31, 2004 to $2.4 million, the amount of the settlement, and reduced bad debt expense by $1.7 million, which is included in direct project costs.
	(3)	We reclassified $2.0 million of deferred tax assets to current assets.

Healthcare Reform And Regulatory Matters

          The healthcare reimbursement landscape continues to evolve. Federal, state, and local governments, as well as other third-party payors, continue their efforts to reduce the rate of growth in healthcare expenditures. Many of these policy initiatives have contributed to the complex and time-consuming nature of obtaining healthcare reimbursement for medical services.

          Our clients are subject to comprehensive federal and state regulation, which affects hospital reimbursement. Medicaid and Medicare account for a significant portion of hospital revenue. Since adoption, the Medicaid and Medicare programs have undergone significant and frequent changes, and it is realistic to expect additional changes in the future. Our services are subject to regulations pertaining to billing for Medicaid and Medicare services, which primarily involve record keeping requirements and other provisions designed to prevent fraud. We believe that we operate in a manner consistent with such regulations, the enforcement of which is increasingly more stringent. Violations of such regulations could adversely affect our business, financial condition and results of operations.

          The Medicare program is administered by the Centers for Medicare and Medicaid Services (CMS), an agency of the United States Department of Health and Human Services. CMS currently contracts with several intermediaries and fiscal agents to process regional claims for reimbursement. Although CMS has established the regulatory framework for Medicare claims administration, Medicare intermediaries have the authority to develop independent procedures for administering the claims reimbursement process. The Medicaid program is subject to regulation by CMS, but is administered by state governments. State governments provide for Medicaid claims reimbursement either through the establishment of state operated processing centers or through contractual arrangements with third-party fiscal agents who operate their own processing centers. The requirements and procedures for reimbursement implemented by Medicaid differ from state to state. Similar to the claims administration processes of Medicare and Medicaid, many national health insurance companies and self-insured employers adjudicate claims through local or regional offices. Consequently, because guidelines for the reimbursement of claims are generally established by third-party payors at local or regional levels, hospital and other provider reimbursement managers must remain current with the local procedures and requirements of third-party payors. Generally, we are required to maintain standards of confidentiality that are comparable to those of an agency administering the Medicare or Medicaid program when we use data obtained from such programs.

          The Health Insurance Portability and Accountability Act of 1996 requires the Secretary of Health and Human Services to adopt national standards for certain types of electronic health information transactions and the data elements used in such transactions and to adopt standards to ensure the integrity and confidentiality of health information. All covered entities (providers, payors, and clearinghouses) will be mandated to implement administrative, physical, and technical safeguards to protect health data covered by HIPAA. The regulations are in the following stages of finalization and implementation:

Transaction and code set standards. The final regulation governing transaction and code set standards was published and was expected to become effective on October 16, 2002. However, on December 27, 2001 the Administrative Simplification Compliance Act (ASCA) was enacted providing for a one-year extension of the date for complying with the HIPAA standard transactions and code set requirements for any covered entity that submits to the Secretary of Health and Human Services a plan on how the entity will come into compliance with the requirements by October 16, 2003. We submitted such a plan to be in full compliance with the standard transaction and code set requirements by the October 16, 2003 deadline. As of October 16, 2003, however, a number of providers, payors and clearinghouses were still not ready to submit and/or

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accept certain standard transactions. CMS, as well as a number of fiscal intermediaries and other payors, announced transition time periods during which legacy transaction and code set formats would still be accepted, albeit for a limited time only. As of December 31, 2004, a limited number of these transition periods, including the one announced by CMS, are still in effect. In these instances, as applicable, we continue to test with those trading partners operating under transition plans and expect to be fully compliant by the time the transition time periods expire.

Privacy Regulation. The privacy regulation was published as a final regulation and became effective on April 14, 2001, requiring all covered entities to be fully compliant by April 14, 2003. We believe we were in full compliance with the privacy regulation by the April 14, 2003 deadline and continue to be compliant.

Data Security. The data security regulation was published as a final regulation on February 20, 2003, with an effective date of April 21, 2003. Full compliance is required by April 21, 2005. We are working toward being fully compliant by that date and have every expectation of being so.

          Any material restriction on the ability of healthcare providers and payors to obtain or disseminate health information could adversely affect our business, financial condition, and results of operations. With the release of the final HIPAA Privacy and Security rules, the “protection of individually identifiable healthcare information” becomes a key component of the way we and other covered entities perform our day-to-day business.

Principal Products And Services

          Health Management Systems

          Health Management Systems offers a variety of services that help government healthcare entitlement programs, most notably state Medicaid agencies, contain costs and recover revenue. To date, these revenue recoveries total more than $2.6 billion, after having passed the $2.0 billion milestone in October 2003.

          Our services derive from the complexity of Medicaid and other healthcare entitlement programs, and the many rules that govern relationships among them. Established in 1965, Medicaid is administered by individual states, and is jointly funded by the federal and state governments. Because Medicaid is the “payor of last resort,” the federal government imposed statutory obligations in the early 1980s requiring states to actively recover payments made on behalf of beneficiaries who have other forms of third-party health insurance.

          In 1985, Health Management Systems began offering state Medicaid agencies services to identify third parties with prior liability for Medicaid claims. Using proprietary information management techniques, we have developed methodologies that generally include the following steps:

	•	Identification: We use proprietary software to match Medicaid and other program data files to insurance eligibility files obtained by us from third parties such as Medicare, Commercial Insurers, HMOs, Third Party Administrators, TRICARE, and others. This process identifies potential third-party eligibility.
	•	Validation: After identification of potential third-party liability, we validate insurance eligibility by verifying coverage for specific benefits. This process is performed by deploying automated electronic transactions and call center representatives.
	•	Recovery: When eligibility and coverage are in effect for a specific Medicaid member and related episode of care, we pursue recovery of the Medicaid payment from the liable third-party. Most often we recover from third-parties through direct billing of insurers or disallowance of overpayments to the provider of services. On occasion, we recover payments through negotiated settlements.
	•	Cost Avoidance: Upon verification of coverage or payment of claims by liable third-parties, we electronically submit this coverage data to our Medicaid clients. This data is used to avoid paying similar claims for the Medicaid member on a going forward basis.

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These proprietary methodologies are the foundation for our suite of coordination of benefits (COB) services. In addition, we use a variety of auditing and information management techniques to help clients identify and recover other inappropriate payments – for example, duplicate payments, payments that are made on behalf of a deceased beneficiary, or payments that result from fraud and abuse.

          Accordis

          Accordis offers emergency medical transport providers, hospitals and other healthcare providers Business Office services and Reimbursement services.

          Emergency Medical Transport Provider Services. We offer our clients a combination of technology, data processing capacity, and revenue cycle expertise to assist ambulance providers in improving cash flow and reducing the cost to bill and collect. Accordis applies its revenue management expertise to ensure optimal reimbursement for all types of ambulance service providers—hospital-based and municipal, reducing the significant administrative burden of billing third parties and patients. We utilize our proprietary AccessLine system to track all liquidation activity associated with ambulance accounts, and provide clients with real-time access to account information.

          Reimbursement Services. Our Reimbursement services ensure that healthcare providers correctly document services which qualify for special reimbursement through the Medicare Cost Report and other governmental payment mechanisms.

     Coinsurance and deductible balances constitute a significant and growing component of Medicare reimbursement. The Federal government recognizes that these balances often remain uncollected, and allows for a cost report adjustment to claim these amounts as bad debt expense; however, the reporting requirements are very demanding. Our Medicare Bad Debt reporting service accurately documents qualifying balances and assists clients in supplying all documentation required for governmental audit.

     Since 1986, Medicare has allowed hospitals serving a disproportionate share of low-income patients to claim additional Federal reimbursement to offset the expense of serving this population. Again, the reporting requirements are significant, and require an increasing amount of reconciliation between the hospital’s own records and government systems. Our Disproportionate Share reporting service assists hospitals in qualifying for reimbursement under this program, through the Medicare cost report related filings and professional support during audits.

          Business Office Services. Our business office services encompass all or a portion of the patient accounting activities that make up a healthcare provider’s revenue cycle. Such revenue cycle activities may include third-party resource identification and validation, submission of timely and accurate bills to primary and secondary payors, generation of patient statements, response to patient and third-party questions, recovery of payments due, and proper accounting for payments, contractual allowances and write-offs. These services are designed to increase the provider’s revenue, improve the proportion of provider gross charges ultimately collected, accelerate cash flow, lower days in accounts receivable, and reduce administrative costs. A client may outsource one or more aspects of its patient accounting processes or may outsource the business office in its entirety. In some cases, our services are used by providers who need assistance in liquidating aged or complex accounts. At the request of a client, we are also able to provide bad debt collection services through a wholly owned subsidiary.

Customers

          Health Management Systems’ clients primarily consist of government healthcare and human services agencies within state and county governments. We also serve managed care plans that work with these agencies. Typically, clients award contracts for three to five year terms, and we receive contingency fees calculated as a percentage of the amounts recovered. We now have contracts with 24 states and 10 managed care plans.

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          Accordis’ clients are public, voluntary and for-profit acute care hospitals and associated clinics, emergency medical transport agencies and large physician practices. Among Accordis’ clients are the nation’s three largest public health systems and the two largest emergency medical transport agencies. We engage in both multi-year and short-term engagements with our clients and substantially all of the engagements provide for contingent fees calculated as a percentage of the amounts recovered or collected for the client.

          Our largest client is the Los Angeles County Department of Health Services in California. This client accounted for 10%, 12%, and 14% of our total revenue in the fiscal years ended December 31, 2004, 2003 and 2002, respectively. The loss of this customer would have a material adverse effect on Accordis and HMS Holdings Corp. We provide Los Angeles County (or designated facilities within Los Angeles County) with, among other services, secondary third-party resource identification and recovery services, commercial insurance billing services, Medi-Cal billing and follow-up services, and financial management and consulting services relating to both inpatient and outpatient accounts. Either party may terminate the agreement with or without cause upon written notice (10 days notice for Los Angeles County and 30 days notice from us), except that financial management and consulting services require 90 days written notice of termination. We provide services to this client pursuant to a contract awarded in April 2003 for a one-year period with two annual automatic renewals through June 2006. We have been providing services to this client for more than 20 years.

          The clients constituting our ten largest clients change periodically. The concentration of revenue in such accounts was 59%, 63% and 56%, of our revenue in the fiscal years ended December 31, 2004, 2003 and 2002, respectively. In many instances, we provide our services pursuant to agreements subject to competitive re-procurement. All of these agreements expire between 2005 and 2008. We cannot provide any assurance that any of these agreements will be renewed and, if renewed, that the fee rates will be equal to those currently in effect.

Market Trends/Opportunities

          Health Management Systems

          Health Management Systems’ business is defined by the nation’s expensive and complex system of government-funded healthcare including entitlement programs such as Medicaid, Medicare, and programs administered by the Department of Defense and the Public Health Service. In addition, state governments operate their own programs to address the healthcare needs of their citizens. Several factors drive the financial characteristics of this market: (1) the hierarchy of programs and payors, (2) the shared funding of programs between federal and state governments, (3) the government budget and appropriations process, and (4) the steadily rising cost of healthcare in the country.

          In 2003, government programs accounted for 45%, or $765 billion, of the $1.7 trillion spent on healthcare in the United States, according to CMS. Since then, government healthcare spending, especially for Medicaid, has only increased. More Americans have enrolled in the Medicaid program, bringing the total number of beneficiaries to 52 million. In calendar year 2004, Medicaid’s total spending is estimated to have reached $309 billion, making Medicaid the largest healthcare payor in the country – and the program’s total spending is forecast to grow at 8% to 9% annually in coming years.

          In 2004, Medicaid spending also grew to become the single largest expenditure by states, larger even than education. And state Medicaid spending is expected to grow at an average of 11.7% in fiscal year 2005 – the most significant increase in recent years – according to the Kaiser Commission on Medicaid and the Uninsured. This dramatic growth is a result, in part, of the expiration of federal emergency relief in 2004. The growth far outstrips the recent progress states have made in reversing the decline of their tax revenues. No wonder that in fiscal year 2005, every state in the nation plans to implement new cost containment measures for Medicaid.

          In addition, states now are preparing to take on additional costs related to the Medicare Modernization Act, which was enacted during 2004. While the Act’s prescription drug benefit, which goes into effect in 2006, ultimately will alleviate some of the costs states have borne, the Act also saddles them with a host of new

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administrative responsibilities. Moreover, states will forego most of their potential savings by making required “clawback” payments to the federal government. As a result, the Congressional Budget Office estimates, states will not see significant savings for years to come – and will pay a net cost of more than $1 billion in 2006.

          As these fiscal pressures and government healthcare spending have grown, so too has the need for proper coordination of benefits and overpayment recovery. From the Office of Management and Budget, the Congressional Management Office and other data, it is estimated that as much as 10% of Medicaid expenditures result from overpayment errors and payments where third-party liability existed.

          Accordis

          A number of factors are forcing healthcare providers to manage their patient accounts more efficiently. Although the aggregate Medicare and Medicaid funding received by hospitals may be growing, federal and state healthcare cost control initiatives are acting to reduce the proportion of Medicare- and Medicaid-classified hospital charges that are reimbursed by government sources. The coordination of benefits associated with ongoing changes to the eligibility for, and coverage available under, governmental, managed care, and commercial insurance programs is increasingly complex. The rising underinsured and uninsured populations pose a significant challenge especially to public hospitals, which comprise a considerable portion of our client base. As providers deliver increasingly more services in outpatient settings, their accounts receivable portfolios have become skewed toward high volume, low balance accounts, creating significantly more work for the business office staff. With the increasing complexity of the healthcare reimbursement environment and shortages of qualified labor in many areas, it is more and more difficult for an individual provider institution to maintain in-house the expertise required to operate patient accounting functions. As a result of these pressures, and as well to reduce cost, providers are now engaging outside help at an earlier stage in the revenue cycle and are seeking help in executing more of the functions of their business offices. A number have entirely outsourced the management of their patient accounting functions, as they seek to focus limited management and financial resources on the delivery of patient care.

          We offer providers a cost-effective outsourcing alternative by virtue of our specialized workforce, through which we offer business office expertise, aptitude with patient accounting technology-based tools, extensive knowledge of federal, state, and local health regulations and experience in dealing with government agencies, commercial insurance companies, and others involved in administering medical assistance or insurance programs.

Competition

          Health Management Systems

          Health Management Systems targets federal and state healthcare programs, Medicaid managed care plans, state prescription drug programs, child support enforcement agencies, and other public programs. We compete primarily with Public Consulting Group, with large national public accounting firms, and with small regional firms specializing in one or more of our services. We compete on the basis of our dominant position in the coordination of benefits marketplace, our extensive eligibility database, our proprietary systems, historically high recovery rates, and pricing.

          Accordis

          Accordis competes with large computer software and systems vendors that provide healthcare business office outsourcing services (e.g., Siemens, Perot Systems, ACS, and McKesson), national collections companies (e.g., NCO Group, Inc.), large consulting and public accounting firms and with the many regional and local companies that provide accounts receivable management services.

          We compete on the basis of our healthcare business office and payor program expertise, proprietary technology and systems, existing relationships, long-standing reputation in the provider market segment, and pricing.

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Business Strategy

          Health Management Systems

The Health Management Systems business strategy includes the following initiatives:

     Grow Client Base. Health Management Systems plans to add clients by tapping the built-in demand created by the growth of government-funded healthcare. We expect our new clients to include state Medicaid programs, Medicaid managed care plans, and other state human service agencies. In addition, we intend to dedicate resources to pursuing clients within the federally funded healthcare system, such as the Medicare program and the Department of Defense TRICARE program.

     Continue to Leverage Technology. In 2004, HMS implemented a variety of technology tools to streamline interaction with providers and speed the recovery of third-party costs at near-real-time. Going forward, we intend to continue using technology in innovative ways to enhance the efficiency of our efforts and improve service to clients.

     Expand Our Portfolio of Services. In response to client demand, HMS plans to draw on its core competencies to expand its range of services and revenue recovery techniques. For example, we are exploring new approaches to pharmacy cost containment, as well as identification and recovery of costs related to fraud, abuse, and waste.

     Expand Client Engagements. As we identify new types of opportunities for government healthcare agencies to contain costs, we expect to grow the scope of our engagements with clients. In some cases, this expansion will be incremental, accomplished through value-added services that build upon our ongoing work with clients. In other cases, we expect these engagements to migrate into full outsourcing relationships, as clients recognize the increasing need for external resources. This is the model that our work has followed in the state of Florida, where we have served as the COB outsourcer since November 2001 – and successfully renewed our contract in 2004.

          Accordis

          The Accordis business strategy is to offer hospitals, emergency medical transport services and other healthcare providers a comprehensive solution for their business office requirements. These Business Office services have been designed to capitalize on our extensive knowledge of federal, state, and local healthcare regulations and the healthcare business office, our experience in dealing with third-party payors, our information processing capabilities, and our specialized workforce. We distinguish our services from those offered by other vendors through our capacity to craft custom solutions, the business office and third-party claiming environment expertise of our staff, our proprietary technology and our substantial installed reference base. Additionally, our proprietary on-line information processing network, AccessLine, enables us to consolidate account information for each patient, validate account data obtained from clients through electronic links to external databases, generate claims to third parties, and organize account information in a format that facilitates cost-effective processing and recovery activities. AccessLine terminals placed onsite provide the client with instant access to individual account status.

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Employees

          As of December 31, 2004, we had 516 employees. No employees are covered by a collective bargaining agreement or are represented by a labor union. We believe our relations with our employees are good.

Financial Information About Industry Segments

          Specific financial information with respect to our industry segments is provided in Note 14, Segments and Geographical Information, of the Notes to Consolidated Financial Statements.

Available Information

          We maintain a website that contains various information about us and our services. It is accessible at www.hmsholdings.com. Through our website, shareholders and the general public may access free of charge (other than any connection charges from Internet service providers) filings we make with the Securities and Exchange Commission as soon as practicable after filing. Filing accessibility in this manner includes the Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, current reports on Form 8-K and Proxy Statements.

Item 2. Properties

          Our New York City corporate headquarters consists of approximately 81,000 square feet. In addition, as of December 31, 2004, we lease approximately 146,000 square feet of office space in 17 locations throughout the United States. See Note 13(a) of the Notes to Consolidated Financial Statements for additional information about our lease commitments.

Item 3. Legal Proceedings

          In April 2004, we reached an agreement with the United States Attorney’s Office for the Southern District of New York to settle certain matters raised in the course of the United States Attorney’s investigation of medical reimbursement claims submitted to Medicaid and other federal healthcare programs on behalf of a significant client of Accordis. In August 2004, we entered into a Stipulation and Order of Settlement and Dismissal Agreement and paid the United States government $1.35 million to settle this matter. At the same time, the qui tam lawsuit against us that was the basis of the government’s investigation was dismissed. As part of the settlement agreement, we entered into a Compliance Agreement with the Office of the Inspector General for the Department of Health and Human Services. The Compliance Agreement covers a three-year period and principally requires us to continue our existing compliance program and to make annual filings certifying compliance.

          The investigation focused on claims submitted since 1982. The issues raised by the government primarily concerned the appropriateness of completing healthcare reimbursement claims with general diagnosis information when specific diagnosis information was not available.

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          We recorded a charge of $1.7 million in the quarter ended March 31, 2004 to reflect the settlement and related legal and other expenses. During the quarter ended September 30, 2004, all amounts due under the settlement agreement were paid.

          Other legal proceedings to which we are a party, in the opinion of our management, are not expected to have a material adverse effect on our financial position, results of operations, or liquidity.

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

          Not applicable.

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PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

          Our common stock is included in the Nasdaq National Market (symbol: HMSY). As of the close of business on March 25, 2005, there were approximately 6,000 holders of our common stock, including the individual participants in security position listings. We have not paid any cash dividends on our common stock and do not anticipate paying cash dividends in the foreseeable future. Our current intention is to retain earnings to support the future growth of our business.

          The table below summarizes the high and low sales prices per share for our common stock for the periods indicated, as reported on the Nasdaq National Market.

Equity Compensation Plan Information

          The following table summarizes the total number of outstanding options and shares available for other future issuances of options under all of our equity compensation plans as of December 31, 2004.

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Issuer Purchases of Equity Securities

          On May 28, 1997, the Board of Directors authorized the Company to repurchase such number of shares of our common stock that have an aggregate purchase price not to exceed $10 million. During the year ended December 31, 2003, we repurchased 35,800 shares for $104,000. While we did not repurchase any of our common stock during the year ended December 31, 2004, we continue to evaluate repurchases under this program. At December 31, 2004, $0.7 million remains authorized for repurchases under the program.

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Item 6. Selected Financial Data
SELECTED CONSOLIDATED FINANCIAL DATA (see Notes)
(In Thousands, Except Per Share Data)

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SELECTED CONSOLIDATED FINANCIAL DATA, continued

Notes to Selected Consolidated Financial Data

•	We adopted Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements (SAB 101) for our fiscal year ended October 31, 2000, implementing a change in accounting in regard to revenue generated from clients seeking reimbursement from third-party payors where our fees are contingent upon the client’s collections from third parties. As of November 1, 1999, we recognized revenue pertaining to such clients once the third-party payor remitted payment to our client. This policy change reduced revenue by $3.0 million and increased net loss by $0.5 million for fiscal year 2000, excluding the cumulative effect of the change. The $22.0 million cumulative effect reflects $41.7 million of unbilled receivables partially offset by $1.5 million of related direct costs and $18.2 million of income tax benefit.
	As of October 31, 1999, we had unbilled accounts receivable of $41.7 million related to our prior revenue recognition policy that had not been invoiced to clients because we were contractually obligated to invoice the client only after they received payment from the responsible third party payors. Of this amount, we subsequently recognized the following amounts in revenue and operating results:

	We were unable to subsequently recognize as revenue $15.4 million of the $41.7 million in accounts receivable that were included in the cumulative effect adjustment as of November 1, 1999. The uncollectible amounts are primarily attributable to projects for state agencies that were undertaken to recoup payments from parties with prior liability for Medicaid claims. In the case of several of these projects, the state agencies, after the completion of the projects on our part (and after the recognition of revenue based on our estimate of the clients’ ultimate financial recovery), made various decisions that significantly reduced the prospects for such recovery. These decisions included narrowing the scope of the completed project, implementing additional requirements prior to seeking reimbursement and, for public policy reasons in some cases, foregoing recovery of amounts otherwise reimbursable to the state agencies. The agencies took these actions over time, and it was not until the end of fiscal 2001 that it became evident that the entire $15.4 million of accounts receivable would not be realized.
	As a result of the implementation of SAB 101, we were required to report in subsequent periods the amount of revenue (if material to income before income taxes) recognized in those periods that was included in the cumulative effect adjustment. Our footnote disclosure in our previously issued financial statements subsequent to the change in revenue recognition policies did not properly distinguish between amounts that were ultimately billed as revenue and amounts that were determined not to be collectable and accordingly not included in revenues. We believe that this mistake had no effect on reported earnings or cash flows on the interim or annual periods subsequent to the adoption of SAB 101.

•

Discontinued Operations. In fiscal year 2001, we sold Health Care microsystems, Inc. which operated as our Decision Support Group (DSG), and implemented a formal plan to close the Payor Systems Group (PSG) through an orderly wind-down of its operations. As these two businesses were previously presented as separate reportable segments and represented separate classes of customers and major businesses, the operating results are presented as discontinued operations for all periods presented. See Note 12 of the Notes to Consolidated Financial Statements.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Critical Accounting Policies

          Revenue Recognition. We principally recognize revenue for our service offerings when third party payors remit payment to our customers. This policy is in effect because our fees are principally contingent upon our customers’ collections from third parties. Due to this revenue recognition policy, our operating results may vary significantly from quarter to quarter because of the timing of such collections by our customers and the fact that a significant portion of our operating expenses are fixed.

          Accounting for Income Taxes. We have incurred net operating losses for tax purposes during the five years prior to the year ended December 31, 2003 and were marginally profitable in the year ended December 31, 2003. After utilizing net operating loss carry-forwards to offset taxable income in 2004, we have cumulative federal net operating loss carry-forwards of $19.1 million as of December 31, 2004. In addition to other items expensed for financial reporting purposes that were not currently deductible for tax purposes, these net operating loss carryforwards result in gross deferred tax assets. We must assess the likelihood that the gross deferred tax assets, net of any deferred tax liabilities, will be recovered from future taxable income and to the extent we believe the recovery is not likely, we have established a valuation allowance.

          Significant management judgment is required in determining this valuation allowance. We have recorded a valuation allowance of $5.6 million as of December 31, 2004, due to uncertainties related to our ability to utilize some of our net deferred tax assets, primarily consisting of certain net operating loss carry-forwards before they expire. The decrease in the valuation allowance from $8.6 million in the prior year is principally attributable to the

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utilization in the current year of net operating loss carryforwards to offset current year taxable income. The valuation allowance is based on our estimate of taxable income and the period over which the net deferred tax assets will be recoverable. In the event that these estimates differ or we adjust these estimates in future periods we may need to establish an additional valuation allowance which could materially impact our financial position and results of operations.

          Conversely, if we are profitable in the future at levels which cause management to conclude that it is more likely than not that we will realize all or a portion of the net deferred tax assets, for which a valuation is currently provided, we would record the estimated net realizable value of the net deferred tax asset at that time and would then provide income taxes at a rate equal to our combined federal and state effective rate of approximately 43%.

          The net deferred tax asset as of December 31, 2004 was $8.9 million, which is net of a valuation allowance of $5.6 million.

          Valuation of long lived and intangible assets and goodwill. Goodwill, representing the excess of acquisition costs over the fair value of net assets of acquired businesses, is not amortized but is reviewed for impairment at least annually and written down only in the periods in which it is determined that the recorded value is greater than the fair value. For the purposes of performing this impairment test, our business segments are our reporting units. The fair values of those reporting units, to which goodwill has been assigned, is compared with their recorded values. If recorded values are less than the fair values, no impairment is indicated. Since adoption, no impairment losses have been recorded.

          Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors we consider important which could trigger an impairment review include the following:

	•	Significant underperformance relative to expected historical or projected future operating results;
	•	Significant changes in the manner of our use of the acquired assets or the strategy for our overall business;
	•	Significant negative industry or economic trends;
	•	Significant decline in our stock price for a sustained period; and
	•	Our market capitalization relative to net book value.

          We determine the recoverability of the carrying value of our long-lived assets based on a projection of the estimated undiscounted future net cash flows expected to result from the use of the asset. When we determine that the carrying value of long-lived assets may not be recoverable, we measure any impairment by comparing the carrying amount of the asset with the fair value of the asset. For identifiable intangibles, we determine fair value based on a projected discounted cash flow method using a discount rate reflective of our cost of funds.

          Estimating valuation allowances and accrued liabilities, such as bad debts, and restructuring charges. The preparation of financial statements requires our management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. In particular, management must make estimates of the uncollectability of our accounts receivable. Management specifically analyzes accounts receivable and analyzes historical bad debts, customer concentrations, customer credit-worthiness, current economic trends and changes in our customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. The accounts receivable balance was $24.0 million, net of allowance for doubtful accounts of $0.9 million as of December 31, 2004.

          Management has reviewed its estimates related to restructuring activities at December 31, 2004 and believes that the estimated liability is based on a reasonable assessment of the probable costs to be incurred. As additional information becomes available, we may revise the estimates. Such revisions in estimates of the potential restructuring liabilities could materially impact the results of operation and financial position.

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          Discontinued Operations. The accompanying financial statements are prepared using discontinued operations accounting for our discontinued DSG and PSG businesses. Under discontinued operations accounting, amounts are accrued for estimates of our expected liabilities related to discontinued operations through their eventual discharge. In July 2001, we determined to proceed with an orderly closure of PSG by accelerating a wind-down of its remaining operations. The DSG business was sold in December 2001. At December 31, 2004, there were no remaining liabilities of the discontinued operations. Any adjustments related to costs to be incurred during the close down or losses from operations have been reflected in 2003 and 2002 as discontinued operations. In the event that any liabilities should arise from these discontinued operations, there could be a material impact on our financial position and results of operations.

          New Accounting Pronouncement. On December 16, 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123 (revised 2004), “Share-Based Payment” (SFAS No. 123R), which is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation.” SFAS No. 123R supercedes APB Opinion No. 25, “Accounting for Stock Issued to Employees”, and amends SFAS No. 95, “Statement of Cash Flows”. Generally, the approach in SFAS No. 123R is similar to the approach described in SFAS 123. However, SFAS No. 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. SFAS No. 123R must be adopted no later than the first interim or annual period beginning after June 15, 2005.

          As permitted by SFAS No. 123, we currently account for share-based payments to employees using APB Opinion No. 25’s intrinsic value method and, as such, generally recognize no compensation cost for employee stock options. Accordingly, the adoption of SFAS No. 123R’s fair value method will have a significant impact on our results of operations. The impact of the adoption of SFAS No. 123R cannot be determined at this time because it will depend upon levels of share-based payments granted in the future. However, had we adopted SFAS 123R in prior periods, the impact of that standard would have approximated the impact as described in the disclosure of pro forma net (loss) income and net (loss) income per share pursuant to SFAS No. 123 in Note 1 of Notes to Consolidated Financial Statements.

          The above listing is not intended to be a comprehensive list of all of our accounting policies. 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 the audited consolidated financial statements and notes thereto included in this Form 10-K contain accounting policies and other disclosures required by accounting principles generally accepted in the United States of America.

Overview

          In general, our business is driven by the consistently rising costs of healthcare in the United States. The nation’s healthcare costs are expected to total $1.9 trillion in 2005, representing an increase of nearly 50% since 2000. These costs seriously affect both healthcare payors and healthcare providers, creating demand for the services we offer through our two distinct operating subsidiaries, Health Management Systems and Accordis.

          Our work also is highly customized to the needs of each client, and to the specifications of individual projects. Each client engagement is unique, and requires significant up-front investment, sometimes well before the engagement generates revenue.

          Ultimately, each project results in revenues and costs that must be carefully controlled. We accomplish this by striving to minimize the lead-time between project start-up and revenue generation, and by adapting common core processes to the particular needs of our clients as efficiently as possible. We also establish very specific operational metrics and profitability targets at the project level, which in turn roll up to create measurable financial objectives at the business-unit level.

          The following discussion goes into further depth regarding the macroeconomic considerations that drive our revenues. The discussion of expenses then focuses on some of the factors that historically have determined the relationship between our revenues and costs.

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Revenue Considerations

          Revenue from our Health Management Systems business, most of which is derived from contingent fees, has grown in tandem with the rise in expenditures for entitlement programs such as Medicaid. Medicaid costs have grown by an average of approximately 10% annually over the past several years, and similar growth is expected for years to come. In addition, state governments have increasingly engaged vendors to provide coordination of benefits and cost containment services. However, there is no certainty that Health Management Systems will be successful in obtaining these contracts. In addition, it is unclear what impact the increased scrutiny of entitlement programs and the ongoing debate about healthcare reform may have on Health Management Systems’ revenues.

          In the provider arena, hospitals face a steady increase in the cost of providing medical care even as reimbursement from governmental and other entitlement programs is under continuous scrutiny. Given this financial pressure, we expect that hospitals will continue to delegate various business office functions to Accordis as a way of optimizing reimbursements and reducing costs for non-core activities. These activities include Medicare Bad Debt recovery, Disproportionate Share Claiming, and accounts receivable management, for which Accordis has developed technology-based solutions. As we have seen in the past year, emergency medical transport providers are also increasingly outsourcing their billing and collections to specialists in order to improve cash flow and reduce administrative costs. We expect this trend to continue. As always, however, there are no assurances that Accordis will be able to secure contracts for its services.

          Finally, it should be noted that the nature of our business sometimes leads to significant variations in revenue flow. For example, since we receive contingency fees for nearly all our services, we recognize revenue only after our clients have received payment from a third party. In addition, much of our work occurs on an annual or project-specific basis, and does not necessarily recur monthly or quarterly, as our operating expenses do. See a more detailed discussion in the Risk Factors section, below.

Operating Expenses

          As a service company, 50% to 55% of our operating expenses are compensation. We adjust our employee headcount based on known business needs and expectations about the near-term future. Based on recent operating results, we realize that compensation expense does tend to grow with increases in revenue – although not on a proportional basis, since many employee functions do not require additional staff as revenue increases.

          Our revenue growth over the past several years has not resulted in significant changes in occupancy and data processing expenses. These expenses are largely infrastructure costs, which typically would be affected only by extraordinary growth or decline in the business, or a dramatic change in our operational delivery model.

          Direct project expenses are incurred based on the requirements of each client engagement. On average, these expenses have amounted to approximately 17% to 18% of revenues annually.

          Other operating expenses reflect the customary costs of doing business, such as insurance, legal fees, accounting and tax fees, and costs associated with the requirements of being a publicly traded company. Significant components of this expense category are costs of necessary external professional services, travel and entertainment, employee recruiting, training, and office materials.

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Years Ended December 31, 2004 and 2003

          Continuing Operations:

          The following table sets forth, for the periods indicated, certain items in our Consolidated Statements of Operations expressed as a percentage of revenue:

          Operating Results

          Aside from the discussion above regarding revenue fluctuations due to our revenue recognition policy and the project nature of some of our revenues, our operating expenses can increase based on discrete spending activities such as the legal fees and settlement charges we incurred in 2004 and 2003 related to the investigation by the United States Attorney’s Office and in 2004, the costs associated with Sarbanes-Oxley compliance.

          Revenue for the year ended December 31, 2004 was $85.2 million, an increase of $10.8 million or 14.6% compared to revenue of $74.4 million in the prior fiscal year ended December 31, 2003.

          Health Management Systems, which provides third party liability identification and recovery services to state Medicaid agencies, generated revenue of $44.0 million in 2004, a $6.9 million or 18.5% increase over the prior year revenue of $37.1 million. This increase primarily reflected $1.0 million of revenue during the current year from two new state and one managed health plan clients and $0.4 million related to the expansion of services for two existing clients. In addition, revenue increased by $5.5 million across the comparable client base reflecting specific non-recurring revenue opportunities with certain clients based on their particular needs, differences in the timing of when client projects were completed in the current year compared with the prior year, and changes in the volume, yields and scope of client projects. Non-recurring revenue opportunities are generally situations where we have an opportunity to earn additional revenue from a client which we do not expect will recur in the current year or which did not exist in the prior year. There were no client terminations during 2004.

          Accordis, which provides outsourced business office services for hospitals, generated revenue of $41.2 million in 2004, a $3.9 million or 10.6% increase from the prior year revenue of $37.3 million. This increase

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primarily consisted of $3.6 million of revenue from seven new customers since the prior year period and a $0.8 million increase with three customers resulting from expansions in the scope of services provided. In addition, revenue increased by $2.2 million across the comparable client base reflecting specific non-recurring revenue opportunities with certain clients based on their particular needs, differences in the timing of when client projects were completed in the current year compared with the prior year, and changes in the volume, yields and scope of client projects. These increases were partially offset by a decrease in revenue of $2.7 million associated with five terminated or inactive customer relationships.

          Effective November 29, 2004, our contract with George Washington University Hospital (GW) was terminated in connection with a decision by GW’s parent to consolidate billing and collection activities in centralized billing offices. This contract originally had been scheduled to end June 30, 2005. As a result of this early termination, the Company and GW elected to accelerate the wind-down of services. Accordingly, by December 31, 2004, all services to GW were completed and we closed our Columbia, Maryland office. In 2004, revenue and operating margin from the GW contract were $5.8 million and $2.0 million, respectively.

          Operating expenses as a percentage of revenue were 91.2% in the current year compared to 97.5% in the prior year and for 2004 were $77.7 million, an increase of $5.2 million, or 7.2%, compared to prior year operating expenses of $72.5 million. The increased operating expenses in 2004 were principally due to the increases in revenue in both of the operating businesses.

          Compensation expense as a percentage of revenue was 51.0% in the current year compared to 52.6% in the prior year and for 2004 was $43.4 million, an increase of $4.3 million, or 10.9% from the prior year period expense of $39.1 million. This dollar increase resulted from higher headcount, general increases in compensation rates and the cost of employee benefits. At December 31, 2004, we had 516 employees, compared to 493 employees at December 31, 2003.

          Data processing expense as a percentage of revenue was 5.7% in the current fiscal year compared to 6.3% in the prior fiscal year and for 2004 was $4.9 million, an increase of $0.2 million or 4.3% compared to the prior year expense of $4.7 million. The current year increase is primarily due to increased software costs.

          Occupancy expense as a percentage of revenue was 6.5% in the current year compared to 7.5% in the prior year and for 2004 was $5.5 million, a decrease of $0.1 million or 1.6% from the prior year expense of $5.6 million. This net decrease reflects the full impact of subletting one floor at our New York City headquarters and reducing office space in our Springfield, Illinois office partially offset by nominal increases in rent and other occupancy expenses.

          Direct project expense as a percentage of revenue was 16.4% in the current year compared to 17.4% in the prior year and for 2004 was $14.0 million, an increase of $1.1 million or 8.2% from the prior fiscal year expense of $12.9 million. This increase reflects a $2.3 million increase in expense related to Health Management Systems partially offset by a $1.2 million decrease in expense related to Accordis. The Health Management Systems increase resulted from greater participation of subcontractors related to revenue composition and growth. The Accordis decrease was principally due to the reversal of $1.7 million in bad debt expense due to the March 2005 settlement of two accounts receivable from the District of Columbia which had been fully reserved previously, a net $1.0 million reduction in subcontractor fees based on the particular mix of client engagements, and partially offsetting increases in temporary agency and subcontractor expenses of $1.5 million associated with new business.

          Other operating expenses as a percentage of revenue were 9.5% in the current year compared to 10.3% in the prior year and for 2004 were $8.1 million, an increase of $0.5 million or 6.7% compared to the prior year expense of $7.6 million. This net increase resulted from $0.8 million in expenses primarily for professional fees associated with Sarbanes-Oxley compliance partially offset by reductions of general corporate legal fees.

          There were no restructuring costs in the current year, compared to $0.4 million in the prior year, reflecting an additional charge associated with higher than estimated real estate taxes on sublet office space.

          Costs resulting from the United States Attorney’s investigation as a percentage of revenue were 2.1% in the current year compared to 2.9% in the prior year and for 2004 were $1.8 million, a decrease of $0.4 million or 18.6%

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from the prior year expense of $2.2 million. This matter was settled in April 2004. See Part I, Item 3. Legal Proceedings.

          Operating income for the year ended December 31, 2004 was $7.5 million compared to $1.9 million for the prior year. The Accordis operating loss was $2.1 million for the year ended December 31, 2004 compared to an operating loss of $4.6 million in the prior year. Health Management Systems had an operating profit of $9.6 million for the year ended December 31, 2004 compared to an operating profit of $6.5 million in the prior year. The decrease in the Accordis operating loss largely reflects the increase in revenue partially offset by increased compensation and direct costs expense as discussed above. The increase in Health Management Systems operating profitability largely reflects the increase in revenue partially offset by increased direct costs and compensation expense as discussed above.

          In 2004, we recognized income tax expense of $115,000, principally an alternative minimum tax liability resulting from our utilization of existing net operating loss carryforwards to offset current taxable income. In 2003, we did not recognize any income tax expense or benefit against our net losses. We have incurred significant taxable losses in prior years. Most of our deferred income tax assets are in the form of net operating loss carry-forwards. A recoverability analysis was performed based on our recent taxable loss history and projections of future taxable operating results.

          Net interest income of $323,000 in fiscal year 2004 compared with $256,000 in the prior year reflects an increase in market interest rates.

          Income from continuing operations was $7.7 million in the current year compared with $2.1 million in the prior year. The $5.6 million increase in income largely reflects the increase in revenue partially offset by increases in operating expenses as discussed above.

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Years Ended December 31, 2003 and 2002

          Continuing Operations:

          The following table sets forth, for the periods indicated, certain items in our Consolidated Statements of Operations expressed as a percentage of revenue:

          Revenue for the year ended December 31, 2003 was $74.4 million, an increase of $5.7 million or 8.4% compared to revenue of $68.6 million in the prior fiscal year ended December 31, 2002.

          Health Management Systems, which provides third party liability identification and recovery services to state Medicaid agencies, generated revenue of $37.1 million in 2003, a $4.8 million or 14.9% increase over the prior year revenue of $32.3 million. This increase primarily reflected $0.5 million of revenue during the current year from two new state clients and $1.6 million related to the expansion of services for an existing client. In addition, revenue increased by $3.8 million across the comparable client base reflecting specific non-recurring revenue opportunities with certain clients based on their particular needs, differences in the timing of when client projects were completed in the current year compared with the prior year, and changes in the volume, yields and scope of client projects. Non-recurring revenue opportunities are generally situations where we have an opportunity to earn additional revenue from a client which we do not expect will recur in the current year or which did not exist in the prior year. These increases were partially offset by a $1.1 million decrease in revenue resulting from the termination of two client relationships in the prior year.

          Accordis, which provides outsourced business office services for hospitals, generated revenue of $37.3 million in 2003, a $0.9 million or 2.6% increase from the prior year revenue of $36.3 million. This increase primarily consisted of $4.0 million of revenue from four new customers since the prior year period and a $2.0 million increase with four customers resulting from an expansion in the scope of services provided. These increases were partially offset by a decrease in revenue of $2.8 million across the comparable client base reflecting specific non-recurring revenue opportunities with certain clients based on their particular needs, differences in the timing of when client projects were completed in the current year compared with the prior year, and changes in the volume, yields and scope of client projects. There was also a reduction in revenue of $2.3 million associated with 12 terminated or inactive customer relationships. These decreases in revenue across the comparable client base and the decrease associated with terminated or inactive client relationships include an estimated permanent revenue loss in

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the second quarter of $1.2 million attributable to processing delays and other impacts of the redirection of operational resources to regulatory matters. See Part I-Item 3. Legal Proceedings.

          Operating expenses as a percentage of revenue were 97.5% in 2003 compared to 104.4% in the prior year and for 2003 were $72.5 million, an increase of $0.8 million, or 1.2%, compared to prior year operating expenses of $71.7 million. The increased operating expenses in 2003 were principally due to the increases in revenue in both of the operating businesses. As discussed below in more detail, legal fees associated with our response to the subpoena from the United States Attorney’s Office were substantially offset by several non-recurring charges in 2002.

          Compensation expense as a percentage of revenue was 52.6% in 2003 compared to 55.1% in the prior year and for 2003 was $39.1 million, an increase of $1.3 million, or 3.5% from the prior year period expense of $37.8 million. This dollar increase resulted from general increases in compensation rates and the cost of employee benefits. At December 31, 2003, we had 493 employees, compared to 506 employees at December 31, 2002. The current year headcount and related compensation expense reflects a shift to service center employees for the provision of business outsourcing services from higher paid information technology employees.

          Data processing expense as a percentage of revenue was 6.3% in 2003 compared to 8.7% in the prior fiscal year and for 2003 was $4.7 million, a decrease of $1.1 million or 21.3% compared to the prior year expense of $6.0 million. The prior year costs included $1.3 million associated with service development and system enhancement and reconfiguration activities that were terminated in the second quarter of 2002, including a charge of $0.6 million for the disposal and impairment of hardware and software items.

          Occupancy expense as a percentage of revenue was 7.5% in 2003 compared to 8.5% in the prior year and for 2003 was $5.6 million, a decrease of $0.3 million or 4.4% from the prior year expense of $5.9 million. This net decrease reflects subletting one floor at our New York City headquarters, partially offset by nominal increases in rent and other occupancy expenses.

          Direct project expense as a percentage of revenue was 17.4% in 2003 compared to 16.8% in the prior year and for 2003 was $12.9 million, an increase of $1.4 million or 12.4% from the prior fiscal year expense of $11.5 million. This increase reflects a $0.9 million increase in expense related to Accordis, and a $0.5 million increase in expense related to Health Management Systems. The Accordis increase was principally due to increased subcontractor expenses of $1.2 million and $0.4 million of increased mailing costs partially offset by a $0.5 million reduction in professional fees based on the particular mix of client engagements. The increase related to Health Management Systems is consistent with a 14.9% increase in revenues.

          Other operating expenses as a percentage of revenue were 10.3% in the current year compared to 14.0% in the prior year and for 2003 were $7.6 million, a decrease of $2.0 million or 20.9% compared to the prior year expense of $9.6 million. This net decrease resulted from (1) a decrease of $1.2 million primarily for consulting and professional service fees associated with a service development initiative and a system reconfiguration effort, both of which were terminated in the second quarter in 2002; (2) a decrease of $0.7 million relating to expense in the prior year period related to certain stock option grants to members of the Board of Directors; and (3) a reduction in all other expenses of $0.1 million.

          Restructuring costs as a percentage of revenue were 0.5% in the current year compared to 1.3% in the prior year and in 2003 were $0.4 million, a decrease of $0.5 million from 2002. Restructuring costs in 2002 reflect: (1) an $0.8 million restructuring charge associated with reducing the amount of office space we occupy at our headquarters in New York City based on an executed sublease and (2) an additional $0.1 million in facility exit costs associated with the closure of our Washington, D.C. office. In 2003, restructuring charges reflect an additional $0.4 million associated with higher than estimated real estate taxes on sublet office space.

          Costs resulting from the United States Attorney’s investigation as a percentage of revenue were 2.9% or $2.2 million in 2003. There were no similar costs in 2002.

          Operating income for the year ended December 31, 2003 was $1.9 million compared to an operating loss of $3.0 million for the prior year. The Accordis operating loss was $4.6 million for the year ended December 31, 2003

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compared to an operating loss of $7.6 million in the prior year. Health Management Systems had an operating profit of $6.5 million for the year ended December 31, 2003 compared to an operating profit of $4.6 million in the prior year. The decrease in the Accordis operating loss largely reflects several non-recurring items in 2002 including $4.1 million in expenses for service development initiatives and system enhancement and reconfiguration activities partially offset by the $2.2 million in expenses primarily for legal fees associated with the investigation by the United States Attorney’s Office. The increase in Health Management Systems operating profitability largely reflects the increase in revenue discussed above.

          In 2003 and 2002, we did not recognize any income tax benefit (expense) against our income (loss) from continuing operations or the income from discontinued operations. We have incurred significant taxable losses the last several years. Most of our deferred income tax assets are in the form of net operating loss carry-forwards. A recoverability analysis was performed based on our recent taxable loss history and projections of future taxable operating results.

          Net interest income of $0.3 million in fiscal year 2003 compared with $0.5 million in the prior year reflects a shift to shorter term investments and a reduction in market interest rates.

          Income from continuing operations was $2.1 million in 2003 compared with a loss of $2.5 million in the prior year. The $4.6 million increase in income largely reflects the reduction of non-recurring charges, restructuring charges, asset impairments and asset write-offs during the current fiscal year discussed above as well as the effects of increased revenue, particularly in our Health Management Systems business.

          Discontinued Operations

          As more fully discussed in Part 1. Item 1. Business, Note 1(b) and Note 12(b) of the Notes to Consolidated Financial Statements, we reported the results of PSG and DSG as discontinued operations for all periods presented. Income from discontinued operations in 2002 of $3.5 million was principally attributable to (1) a $2.7 million termination fee which was not included in the original loss on disposal estimate for PSG, (2) a reduction in the estimated loss on disposal of PSG of $0.4 million based on actual operating results, and (3) $0.3 million resulting from the favorable resolution of certain DSG operating liabilities. Income from discontinued operations for PSG in 2003 of $0.2 million reflects the actual operating results for that period which were not previously included in the estimated loss on disposal estimate for PSG.

Off-Balance Sheet Arrangements

          We do not have any off-balance sheet arrangements.

Liquidity and Capital Resources

          Historically, our principal sources of funds are operations. At December 31, 2004, our cash and cash equivalents and short-term investments and working capital were $31.7 million and $42.2 million, respectively. Although we expect that operating cash flows will be a primary source of liquidity, the current significant cash and short term investment balances and working capital position are also fundamental sources of liquidity and capital resource. The current cash and cash equivalents and short term investment balances are more than sufficient to meet our short term funding needs that are not met by operating cash flows. Operating cash flows could be adversely affected by a decrease in demand for our services. Our typical customer relationship, however, usually has a duration of several years, such that we do not expect any current decrease in demand. We estimate that we will purchase approximately $3.6 million of property and equipment during 2005, which is consistent with the amount purchased in the current year. The payments due by period for our contractual obligations, consisting principally of facility lease obligations and equipment rental and software license obligations, are as follows (in thousands):

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          We have entered into sublease arrangements for some of our facility obligations and expect to receive the following rental receipts (in thousands):

          For the year ended December 31, 2004, cash provided by operations was $7.0 million compared with $1.5 million for the prior year. The current year cash provided by operations of $7.0 million primarily results from $7.7 million of net income plus depreciation and amortization charges of $2.3 million, and an increase in current liabilities of $3.6 million reduced by an increase in accounts receivable of $6.7 million. During the current year, cash used in investing activities was $26.5 million reflecting the net purchase of $22.4 million in short term investments (which was reclassified to short-term investments from cash and cash equivalents), purchases of $3.7 million for property and equipment, and a $0.4 million investment in software.

Inflation

          Historically, inflation has not been a material factor affecting our revenue, and general operating expenses have been subject to normal inflationary pressure. However, our business is labor intensive. Wages and other employee-related expenses increase during periods of inflation and when shortages in the skilled labor market occur. We also have a performance-based bonus plan to foster retention of and incent certain employees.

Risk Factors

PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
SAFE HARBOR COMPLIANCE STATEMENT
FOR FORWARD-LOOKING STATEMENTS

          In passing the Private Securities Litigation Reform Act of 1995 (the Reform Act), Congress encouraged public companies to make “forward-looking statements” by creating a safe harbor to protect companies from securities law liability in connection with forward-looking statements. We intend to qualify both our written and oral forward-looking statements for protection under the Reform Act and any other similar safe harbor provisions.

          “Forward-looking statements” are defined by the Reform Act. Generally, forward-looking statements include expressed expectations of future events and the assumptions on which the expressed expectations are based. All forward-looking statements are inherently uncertain as they are based on various expectations and assumptions concerning future events and they are subject to numerous known and unknown risks and uncertainties which could cause actual events or results to differ materially from those projected. Due to those uncertainties and risks, prospective investors are urged not to place undue reliance on written or oral forward-looking statements of the Company. We undertake no obligation to update or revise this safe harbor compliance statement for forward-looking statements to reflect future developments. In addition, we undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time.

          We provide the following risk factor disclosures in connection with our continuing effort to qualify our written and oral forward-looking statements for the safe harbor protection of the Reform Act and any other similar safe harbor provisions. Important factors currently known to management that could cause actual results to differ materially from those in forward-looking statements include the following:

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Our Operating Results Are Subject To Significant Fluctuations Due To Variability In The Timing Of When
We Recognize Contingency Fee Revenue And Other Factors. As A Result, You Will Not Be Able To Rely On
Our Operating Results In Any Particular Period As An Indication Of Our Future Performance

          Our revenue and consequently our operating results may vary significantly from period to period as a result of a number of factors, including the loss of customers due to consolidation in the healthcare industry, fluctuations in sales activity given our sales cycle of approximately three to eighteen months, and general economic conditions as they affect healthcare providers and payors. Further, we have experienced fluctuations in our revenue of up to 25% between reporting periods due to the timing of periodic revenue recovery projects and the timing and delays in third-party payors’ adjudication of claims and ultimate payment to our clients where our fees are contingent upon such collections. The extent to which future revenue fluctuations could occur due to these factors is not known and cannot be predicted. As a consequence, our results of operations are subject to significant fluctuations and our results of operations for any particular quarter or fiscal year may not be indicative of results of operations for future periods. A significant portion of our operating expenses are fixed, and are based primarily on revenue and sales forecasts. Any inability on our part to reduce spending or to compensate for any failure to meet sales forecasts or receive anticipated revenues could magnify the adverse impact of such events on our operating results.

We Are Subject To Claims If Our Service Offerings Contain Errors Or Experience Failures Or Do Not Meet
Customer Expectations And Could Lose Customers And Revenue

          The healthcare claiming environment is complex. On behalf of our clients, our Accordis business processes a very high volume of transactions in this environment. From time to time, we have been subject to claims by clients and could be subject to claims by clients in the future for errors in our service offerings, primarily for failures to secure reimbursement amounts otherwise payable to our clients. We have often resolved such claims by providing additional services to the client or by reducing fees on additional projects. There can be no assurance that contractual limitations of our responsibility for damages will be effective in these situations or that clients will not seek significant damages for errors in our services. Further, these performance failures could result in a loss of customers and resulting loss of revenue. In addition, service performance failures could result in a delay in market acceptance for our services, diversion of development resources, damage to our reputation or increased service costs.

The Majority Of Our Contracts With Customers May Be Terminated For Convenience

          The majority of our contracts with customers are terminable upon short notice for the convenience of either party. Although to date none of our material contracts have ever been terminated under these provisions, we cannot assure you that a material contract will not be terminated for convenience in the future. Any termination of a material contract, if not replaced, could have a material adverse effect on our business, financial condition and results of operations.

We Face Significant Competition For Our Services

          Competition for our services is intense and is expected to increase. Increased competition could result in reductions in our prices, gross margins and market share. We compete with other providers of healthcare information management and data processing services, as well as healthcare consulting firms. Some competitors have formed business alliances with other competitors that may affect our ability to work with some potential customers. In addition, if some of our competitors merge, a stronger competitor may emerge.

          Current and prospective customers also evaluate our capabilities against the merits of their existing information management and data processing systems and expertise. Major information management systems companies, including those specializing in the healthcare industry, that do not presently offer competing services may enter our markets. Many of our competitors and potential competitors have significantly greater financial, technical, product development, marketing and other resources, and market recognition than we have. As a result, our competitors may be able to respond more quickly to new or emerging technologies, changes in customer requirements and changes in the political, economic or regulatory environment in the healthcare industry. In addition, several of our competitors may be in a position to devote greater resources to the development, promotion, and sale of their services than us.

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Simplification Of The Healthcare Transfer Payment Process Could Reduce The Need For Our Services

          The complexity of the healthcare transfer payment process, and our experience in offering services that improve the ability of our customers to recover incremental revenue through that process, have been contributing factors to the success our service offerings. Complexities of the healthcare transfer payment process include multiple payors, the coordination and utilization of clinical, operational, financial and/or administrative review instituted by third-party payors in an effort to control costs and manage care. If the payment processes associated with the healthcare industry are simplified, the need for our services, or the price customers are willing to pay for our services, could be reduced.

We Are Subject To Government Regulation In Our Collections Services

          The collection industry in the United States is regulated both at the federal and state level. In addition to specific regulation regarding debts for healthcare services and among other collection regulations, the Federal Fair Debt Collection Practices Act (FFDCPA) regulates any person who regularly collects or attempts to collect, directly or indirectly, consumer debts owed or asserted to be owed to another person. The FFDCPA establishes specific guidelines and procedures that debt collectors must follow in communicating with consumer debtors, including the time, place and manner of such communications and places restrictions on communications with individuals other than consumer debtors in connection with the collection of any consumer debt. Additionally, the FFDCPA contains various notice and disclosure requirements and prohibits unfair or misleading representations by debt collectors. Many states require that we be licensed as a debt collection company and we believe that we are currently hold applicable licenses from all states where required. If we fail to comply with applicable laws and regulations, it could result in the suspension or termination of our ability to conduct collections, which would have a material adverse effect on us.

Changes In The United States Healthcare Environment Could Have A Material Negative Impact

          The healthcare industry in the United States is subject to changing political, economic and regulatory influences that may affect the procurement practices and operations of healthcare organizations. Our services are designed to function within the structure of the healthcare financing and reimbursement system currently being used in the United States. During the past several years, the healthcare industry has been subject to increasing levels of governmental regulation of, among other things, reimbursement rates, certain capital expenditures, and data confidentiality and privacy. From time to time, certain proposals to reform the healthcare system have been considered by Congress. These proposals, if enacted, may increase government involvement in healthcare, lower reimbursement rates and otherwise change the operating environment for our clients. Healthcare organizations may react to these proposals and the uncertainty surrounding such proposals by curtailing or deferring their retention of service providers such as us. See also “Part 1. Item 1. Business — Healthcare Reform and Regulatory Matters” for additional discussion on this topic. We cannot predict what impact, if any, such proposals or healthcare reforms might have on our results of operations, financial condition or business.

          Recently, the General Accounting Office, an investigative arm of Congress, added Medicaid to its list of high risk programs. According to the GAO, states have used various financing schemes to generate excessive federal Medicaid matching funds while their own share of expenditures has remained unchanged or decreased. Also on January 30, 2004, the United States Senate Finance Committee Chairman requested that the HHS, CMS, and OIG respond to a lengthy request for information about vendors that provide contingency fee based revenue maximizing or revenue enhancement services to State Medicaid agencies specifically with the intent to increase federal Medicaid reimbursement. This type of service represents a very small portion of our Health Management Systems, Inc. suite of offerings and corresponding revenue streams. We cannot predict what impact, if any, this inquiry might have on our future results of operations, financial condition or business.

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Our Business Is Subject To Extensive And Complex Governmental Regulations And Violations Of Any Of
Those Regulations Could Result In Significant Penalties

          Most of the services offered by our Accordis business involve the billing and collection of healthcare claims. These services require the interpretation and application of sometimes ambiguous reimbursement regulations under various government entitlement programs such as Medicaid and Medicare. In addition, during the past several years, federal and state governments have placed an increased emphasis on detecting and eliminating fraud and abuse in Medicare, Medicaid, and other health care programs. Violation of health care billing laws or regulations governing our services could result in the imposition of substantial civil or criminal penalties, including temporary or permanent exclusion from participation in government health care programs such as Medicare and Medicaid, and loss of customers.

          The interpretation and application of the healthcare reimbursement rules to particular customer patient accounting environments involves judgment. If a regulatory agency were to disagree with certain judgments we have made or will make in providing healthcare billing services to a customer we could be subject to penalties, or fines or other sanctions by regulators. In addition, we could find it necessary to alter or eliminate some of our services.

Certain Provisions In Our Certificate Of Incorporation Could Discourage Unsolicited Takeover Attempts,
Which Could Depress The Market Price Of Our Common Stock

          Our certificate of incorporation authorizes the issuance of up to 5,000,000 shares of “blank check” preferred stock with such designations, rights and preferences as may be determined by our Board of Directors. Accordingly, our Board of Directors is empowered, without shareholder approval, to issue preferred stock with dividend, liquidation, conversion, voting or other rights, which could adversely affect the voting power or, other rights of holders of our common stock. In the event of issuance, preferred stock could be utilized, under certain circumstances, as a method of discouraging, delaying or preventing a change in control. Although we have no present intention to issue any shares of preferred stock, we cannot assure you that we will not do so in the future. In addition, our by-laws provide for a classified Board of Directors, which could also have the effect of discouraging a change of control.

Item 7A. Quantitative and Qualitative Disclosures About Market Risks

          Our holdings of financial instruments consist of municipal auction rate securities at December 31, 2004 and are classified as short-term investments and have contractual maturities between 2030 through 2044. We do not invest in portfolio equity securities or commodities or use financial derivatives for trading purposes. Our investment portfolio represents funds held temporarily, pending use in our business and operations. We manage these funds accordingly. We seek reasonable assuredness of the safety of principal and market liquidity by investing in rated fixed income securities while, at the same time, seeking to achieve a favorable rate of return. Our market risk exposure consists principally of exposure to changes in interest rates. Our holdings are also exposed to the risks of changes in the credit quality of issuers.

          The table below presents the historic cost basis, and the fair value for our investment portfolio as of December 31, 2004, and the related weighted average interest rates (in thousands):

Item 8. Financial Statements and Supplementary Data

          The information required by Item 8 is found on pages 32 to 53 of this report.

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Item 9. Changes in and Disagreements with Independent Registered Public Accounting Firm on Accounting and Financial Disclosure

          None.

Item 9A. Controls and Procedures.

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

          Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the Exchange Act). Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this annual report.

          Our principal executive officer and principal accounting officer also participated in an evaluation by our management of any changes in our internal control over financial reporting that occurred during the quarter ended December 31, 2004. That evaluation did not identify any changes that have materially affected, or are likely to materially affect, our internal control over financial reporting.

Management’s Report on Internal Control Over Financial Reporting

          Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f). Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control — Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2004.

          Our independent auditors, KPMG LLP (KPMG), who have audited and reported on our financial statements, issued a report on our assessment of our internal control over financial reporting and on the effectiveness of our internal control over financial reporting. KPMG’s reports are included in this annual report.

Item 9B. Other Information

          None.

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PART III

Item 10. Directors and Executive Officers of the Registrant

          The information required by Item 10 will be included in our Proxy Statement for the 2005 Annual Meeting of Shareholders which will be mailed within 120 days after the close of our year ended December 31, 2004, and is hereby incorporated herein by reference to such Proxy Statement.

Item 11. Executive Compensation

          The information required by Item 11 will be included in our Proxy Statement, which will be mailed within 120 days after the close of our year ended December 31, 2004, and is hereby incorporated herein by reference to such Proxy Statement.

Item 12. Security Ownership of Certain Beneficial Owners and Management

          The information required by Item 12 will be included in our Proxy Statement, which will be mailed within 120 days after the close of our year ended December 31, 2004, and is hereby incorporated herein by reference to such Proxy Statement.

Item 13. Certain Relationships and Related Transactions

          The information required by Item 13 will be included in our Proxy Statement, which will be mailed within 120 days after the close of our year ended December 31, 2004, and is hereby incorporated herein by reference to such Proxy Statement.

Item 14. Principal Accountant Fees and Services

          The information required by Item 14 will be included in our Proxy Statement, which will be mailed within 120 days after the close of our year ended December 31, 2004, and is hereby incorporated herein by reference to such Proxy Statement.

PART IV

Item 15. Exhibits and Financial Statement Schedules

A.

Financial Statements, Financial Statement Schedule and Exhibits

	1.	The financial statements are listed in the Index to Consolidated Financial Statements on page 32.
	2.	Financial Statement Schedule II – Valuation and Qualifying Accounts is set forth on page 54. All other financial statement schedules have been omitted as they are either not required, not applicable, or the information is otherwise included.
	3.	The Exhibits are set forth on the Exhibit Index on page 55.

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SIGNATURES

          Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

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

31

HMS HOLDINGS CORP. AND SUBSIDIARIES

32

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders
HMS Holdings Corp.:

We have audited the consolidated financial statements of HMS Holdings Corp. and subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule as listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of HMS Holdings Corp. and subsidiaries as of December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of HMS Holdings Corp.’s internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 25, 2005 expressed an unqualified opinion on management’s assessment of, and the effective operation of, internal control over financial reporting.

/s/ KPMG LLP

New York, New York
March 25, 2005

33

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders
HMS Holdings Corp.:

We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, that HMS Holdings Corp. maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). HMS Holdings Corp.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed 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. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that HMS Holdings Corp. maintained effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, HMS Holdings Corp maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of HMS Holdings Corp and subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of income, shareholders’ equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2004, and our report dated March 25, 2005 expressed an unqualified opinion on those consolidated financial statements.

/s/ KPMG LLP

New York, New York
March 25, 2005

34

HMS HOLDINGS CORP. AND SUBSIDIARIES

See accompanying notes to consolidated financial statements.

35

HMS HOLDINGS CORP. AND SUBSIDIARIES

See accompanying notes to consolidated financial statements.

36

HMS HOLDINGS CORP. AND SUBSIDIARIES

See accompanying notes to consolidated financial statements.

37

HMS HOLDINGS CORP. AND SUBSIDIARIES