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SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

OR

Commission file number 000-33395

CENTENE CORPORATION

Registrant’s telephone number, including area code:
(314) 725-4477

     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: [X] Yes [  ] No

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

     As of October 16, 2003, the registrant had 20,063,474 shares of common stock outstanding.

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CENTENE CORPORATION

QUARTERLY REPORT ON FORM 10-Q

INDEX

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PART I

FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

CENTENE CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)

The accompanying notes are an integral part of these statements.

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CENTENE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT SHARE DATA)

The accompanying notes are an integral part of these statements.

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CENTENE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

The accompanying notes are an integral part of these statements.

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CENTENE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)

1.     ORGANIZATION

Centene Corporation (Centene or the Company) provides managed care programs and related services to individuals receiving benefits under Medicaid, including Supplemental Security Income (SSI), and the State Children’s Health Insurance Program (SCHIP). Centene operates under its own state licenses in Wisconsin, Texas, Indiana and New Jersey. In addition, the Company contracts with other healthcare organizations to provide specialty services including behavioral health, nurse triage and pharmacy compliance.

Centene’s managed care organization subsidiaries include Managed Health Services Insurance Corp. (MHSIC), a wholly owned Wisconsin corporation; Superior HealthPlan, Inc. (Superior), a wholly owned Texas corporation; Coordinated Care Corporation Indiana, Inc. (CCCI), a wholly owned Indiana corporation and University Health Plans, Inc. (UHP), a wholly owned New Jersey corporation purchased in increments in December 2002 and October 2003.

Centene’s other subsidiaries include Centene Management Company, LLC (CMC), a wholly owned Wisconsin LLC; Bankers Reserve Insurance Company of Wisconsin (Bankers Reserve), a wholly owned Wisconsin corporation that the Company purchased in March of 2002; NurseWise, LP (NurseWise), a wholly owned Delaware corporation that was formed in August of 2002; Cenphiny, Inc. (Cenphiny), a wholly owned Delaware corporation that was incorporated in December of 2002; and Group Practice Affiliates, LLC (GPA), a wholly owned California LLC purchased in increments in March and August of 2003.

2.     BASIS OF PRESENTATION

The unaudited interim financial statements herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. The accompanying interim financial statements have been prepared under the presumption that users of the interim financial information have either read or have access to the audited financial statements for the latest fiscal year ended December 31, 2002. Accordingly, footnote disclosures, which would substantially duplicate the disclosures contained in the December 31, 2002 audited financial statements, have been omitted from these interim financial statements. In the opinion of management, these financial statements reflect all adjustments, consisting only of normal recurring adjustments, which are necessary for a fair presentation of the results of the interim periods presented.

On May 27, 2003, the Company’s Board of Directors declared a three-for-two stock split effected in the form of a 50% stock dividend payable July 11, 2003 to stockholders of record on June 20, 2003. All share, per share and stockholders’ equity amounts have been restated to reflect this stock split.

Certain 2002 amounts in the consolidated financial statements have been reclassified to conform to the 2003 presentation. These reclassifications have no effect on net earnings or stockholders’ equity as previously reported.

The Company accounts for stock-based compensation under APB Opinion No. 25, “Accounting for Stock Issued to Employees.” The Company has adopted the disclosure-only provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” and SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure.” The following table illustrates the effect on net income and earnings per share if the fair value based method had been applied to all awards.

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3.     RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In May 2002, SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections as of April 2002,” was issued. As a result of the rescission of SFAS No. 4, gains and losses related to the extinguishment of debt should be classified as extraordinary only if they meet the criteria outlined under APB Opinion No. 30, “Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions.” SFAS No. 64, “Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements,” was an amendment to SFAS No. 4 and is no longer necessary. SFAS No. 44, “Accounting for Intangible Assets of Motor Carriers,” defined accounting requirements for the effects of the transition to the Motor Carrier Act of 1980. The transitions are complete and SFAS No. 44 is no longer necessary. SFAS No. 145 amends SFAS No. 13, “Accounting for Leases,” requiring that any capital lease that is modified resulting in an operating lease should be accounted for under the sale-leaseback provisions of SFAS No. 98 or SFAS No. 28, as applicable. SFAS No. 145 is effective for fiscal years beginning after May 15, 2002. The adoption of the provisions of SFAS No. 145 did not have a material impact on the Company’s results of operations, financial position or cash flows.

In June 2002, SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” was issued. It requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. This statement nullifies EITF Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring),” which required that a liability for an exit cost be recognized upon the entity’s commitment to an exit plan. SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002. The adoption of the provisions of SFAS No. 146 did not have a material impact on the Company’s results of operations, financial position or cash flows.

In November 2002, FIN No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others an interpretation of SFAS No. 5, 57, and 107 and rescission of FASB Interpretation No. 34,” was issued. FIN 45 clarifies the requirements of SFAS No. 5, “Accounting for Contingencies,” relating to a guarantor’s accounting for, and disclosure of, the issuance of certain types of guarantees. The adoption of FIN 45 did not have a significant impact on the net income or equity of the Company. The Company has guaranteed that one of its HMO subsidiaries shall have and maintain capital and surplus at least in the minimum amount required by law. The maximum amount of payments required under this guarantee is based on state requirements, however, the capital of this HMO exceeded the amount required at September 30, 2003. There are no recourse provisions to offset payments made under this guarantee arrangement.

In December 2002, SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure,” was issued. This statement amends FASB Statement No. 123, “Accounting for Stock-Based Compensation,” to provide alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of SFAS No. 123 and APB Opinion No. 28, “Interim Financial Reporting,” to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. SFAS No. 148 is effective for fiscal years ending after December 15, 2002 and for interim periods beginning after December 15, 2002. The adoption of the provisions of SFAS No. 148 did not have a material impact on the Company’s results of operations, financial position or cash flows.

On January 17, 2003, FIN 46, “Consolidation of Variable Interest Entities, an Interpretation of ARB 51,” was issued. The primary objectives of FIN 46 are to provide guidance on the identification and consolidation of variable interest entities, or VIEs, which are entities for which control is achieved through means other than through voting rights. The company has completed an analysis of FIN 46 and has determined that it does not have any VIEs.

In April 2003, SFAS No.149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities,” was issued. SFAS No. 149 amends and clarifies SFAS No. 133 to improve financial accounting and reporting for derivative instruments and hedging activities. To ensure that contracts with comparable characteristics are accounted for similarly, SFAS No. 149 clarifies the circumstances under which a contract with an initial net investment meets the characteristics of a derivative, clarifies when a derivative contains a financing component and amends the definition of an underlying and certain other existing pronouncements.

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SFAS No. 149 is effective for contracts entered into or modified and for hedging relationships designated after September 30, 2003, except certain provisions relating to forward purchases and sales of when-issued securities or other securities that do not yet exist should be applied to both existing contracts and new contracts entered into after September 30, 2003. The adoption of SFAS No. 149 is not expected to have a material impact on the Company’s financial statements.

In July 2003, SOP 03-1, “Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts,” was issued. Among other provisions, the SOP provides guidance on separate account presentation. The statement requires disclosure of the nature, extent and timing of minimum guarantees related to variable contracts and the amount of gains and losses recognized on assets transferred to separate accounts. SOP 03-1 is effective for financial statements for fiscal years beginning after December 15, 2003. The adoption of the provisions of SOP 03-1 is not expected to have a material impact on the Company’s results of operations, financial position or cash flows.

4.     EARNINGS PER SHARE

The following table sets forth the calculation of basic and diluted net earnings per common share:

5.     ACQUISITION OF GROUP PRACTICE AFFILIATES

Effective March 1, 2003, Cenphiny, a wholly owned subsidiary of Centene, acquired a 63.7% ownership interest in Group Practice Affiliates, LLC (GPA). GPA, a behavioral healthcare services company, serves over 700,000 individuals in four states through a combination of networks, groups and schools including a portion of Centene’s membership. Effective August 15, 2003, Cenphiny acquired the remaining 36.3% and now owns 100% of GPA. The consolidated financial statements include the results of operations of GPA since March 1, 2003.

Cenphiny paid approximately $5,082 for its total investment in GPA. The cost to acquire the ownership interest has been preliminarily allocated to the assets acquired and liabilities assumed according to estimated fair values and is subject to adjustment when additional information concerning asset and liability valuations are finalized. The preliminary allocation has resulted in goodwill of approximately $3,786. The goodwill is not amortized and is not deductible for tax purposes.

In connection with the acquisition of the remaining 36.3% of GPA, Centene made the decision to close the Atlanta, Georgia office and transition the overhead functions provided to the Company’s other offices. This closure will result in a reduction of employment of approximately 26 people. The estimated cost of this action, $377, was accrued in the opening balance sheet. At September 30, 2003, the Company has terminated one employee in connection with this closure. The remaining accrual for severance, $200, is expected to be paid in the fourth quarter of 2003.

6.     CONTRACT ACQUISITIONS

Effective March 1, 2003, Cenphiny purchased contract and name rights of ScriptAssist, LLC (ScriptAssist), a medication compliance company. Cenphiny is administering the purchased contracts under the ScriptAssist name. ScriptAssist uses various approaches and medical expertise to promote adherence to prescription drugs.

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Cenphiny paid approximately $561 in cash in connection with the purchase from ScriptAssist. Cenphiny allocated the entire purchase price of $561 to identifiable intangible assets, representing the value assigned to acquired contracts, which is being amortized on a straight-line basis over a period of five years, the expected period of benefit.

Effective August 1, 2003, Superior HealthPlan, Inc. (Superior), a wholly owned Texas corporation, acquired the Medicaid-related contract rights of HMO Blue Texas in the San Antonio, Texas market. This transaction allows Superior to serve approximately 17,000 additional members in the state.

Superior paid approximately $890 in cash in connection with the purchase. Superior allocated the entire purchase price of $890 to identifiable intangible assets, representing the value assigned to acquired contracts, which is being amortized on a straight-line basis over a period of five years, the expected period of benefit.

7.     LONG TERM DEBT AND NOTES PAYABLE

In August 2003, the Company borrowed $8,000 under a non-recourse mortgage loan arrangement to finance a portion of its corporate headquarters building purchase price. The mortgage bears interest at the prevailing prime rate less ..25%. At September 30, 2003 the mortgage bore interest at 3.75%. Maturities on the mortgage are as follows:

Additionally, in August 2003, the Company issued a $581 promissory note payable as part of the acquisition of the remaining 36.3% of GPA.

8.     SUBSEQUENT EVENTS

In September 2003, the Company signed a definitive agreement to acquire the Medicaid-related assets of Family Health Plan, Inc., a wholly owned subsidiary of Mercy Health Partners. This transaction includes the right to serve up to 24,000 of Family Health Plan’s Medicaid members in Toledo, Ohio, a new market for the Company. The purchase price is approximately $6.5 million. The Company anticipates this acquisition to be effective in the first quarter of 2004. This acquisition, if completed, will be accounted for under the purchase method of accounting.

On October 15, 2003, the Company exercised its option to purchase the remaining 20% of UHP for approximately $2.6 million.

On October 16, 2003, the Company began trading of its common stock on the New York Stock Exchange. The Company’s common stock was previously traded on the NASDAQ.

9.     SEGMENT INFORMATION

Factors used in determining the reportable business segments include the nature of operating activities, existence of separate senior management teams, and the type of information presented to the Company’s chief operating decision maker to evaluate all results of operations.

With the acquisition of GPA and the purchase of ScriptAssist assets on March 1, 2003, Centene began operating in two segments: Medicaid Managed Care and Specialty Services. The Medicaid Managed Care segment consists of Centene’s health plans including all of the functions needed to operate them. The Specialty Services segment consists of Centene’s specialty companies including behavioral health, nurse triage and pharmacy compliance functions.

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     Segment information for the nine months ended September 30, 2003, follows:

     Segment information for the three months ended September 30, 2003, follows:

The Company evaluates performance and allocates resources based on net earnings. The accounting policies are the same as those described in the “Summary of Significant Accounting Policies” included in Note 2 of the annual consolidated financial statements. Revenue from internal customers is eliminated in consolidation.

10.     COMPREHENSIVE INCOME

Differences between net earnings and total comprehensive income resulted from changes in unrealized gains and losses on investments available for sale, as follows:

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

     The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes appearing elsewhere in this report and in our annual report on Form 10-K for the year ended December 31, 2002. The discussion contains forward-looking statements that involve known and unknown risks and uncertainties, including those set forth below under “Factors that May Affect Future Results and the Trading Price of Our Common Stock.”

OVERVIEW

     We provide managed care programs and related services to individuals receiving benefits under Medicaid, including Supplemental Security Income, or SSI, and the State Children’s Health Insurance Program, or SCHIP. We have health plans in Wisconsin, Texas, Indiana and New Jersey. In addition, we contract with other healthcare organizations to provide specialty services including behavioral health, nurse triage and pharmacy compliance.

     Effective August 1, 2003, we acquired the Medicaid-related contract rights of HMO Blue Texas in the San Antonio, Texas market. This transaction allows us to serve approximately 17,000 additional members in the state. We paid approximately $890,000 in cash in connection with the purchase. We allocated the entire purchase price to identifiable intangible assets, representing the value assigned to acquired contracts, which is being amortized on a straight-line basis over a period of five years, the expected period of benefit.

     Effective March 1, 2003, we acquired a 63.7% ownership interest in Group Practice Affiliates, or GPA. GPA, a behavioral healthcare services company, serves over 700,000 individuals in four states through a combination of networks, groups and schools, including a portion of our membership. Effective August 15, 2003, we acquired the remaining 36.3%. This acquisition is consistent with our strategy to provide diversified medical services to the managed Medicaid population. We paid $5.1 million for our total investment in GPA. The preliminary allocation of acquired assets and liabilities has resulted in goodwill of $3.8 million.

     Also effective March 1, 2003, we purchased contract and name rights of ScriptAssist, a medication compliance company, for $561,000 in cash. We are administering the purchased contracts under the ScriptAssist name. ScriptAssist uses various approaches and medical expertise to promote adherence to prescription drugs. The asset acquisition is consistent with our strategy to provide diversified medical services to the managed Medicaid population. As a result of the ScriptAssist transaction, $561,000 was allocated to an intangible asset, purchased contract rights. We are amortizing the contract rights on a straight-line basis over five years, the period expected to be benefited.

     On December 1, 2002, we acquired 80% of the outstanding capital stock of University Health Plans, or UHP, from University of Medicine and Dentistry of New Jersey, or UMDNJ. UHP is a managed health plan operating in 20 counties in New Jersey. We paid an aggregate purchase price of $10.6 million for our initial interest in UHP. On October 15, 2003 we exercised our option to purchase the remaining 20% of UHP for $2.6 million.

     In June 2002, Superior HealthPlan entered into an agreement with Texas Universities Health Plan Inc. to purchase the SCHIP contracts in three Texas service areas. Effective September 1, October 1 and November 1, 2002, the state of Texas approved the contract sales between Superior and Texas Universities Health Plan, thereby adding approximately 24,000 members to our Texas health plan. As a result of this transaction, $595,000 was recorded as an intangible asset, purchased contract rights. We are amortizing the contract rights on a straight-line basis over five years, the period expected to be benefited.

     With our acquisition of GPA and our purchase of ScriptAssist assets, we began operating in two segments: Medicaid Managed Care and Specialty Services. The Medicaid Managed Care segment consists of our health plans, including all of the functions needed to operate them. The Specialty Services segment consists of our specialty companies, including our behavioral health, nurse triage and pharmacy compliance functions.

     REVENUES

     We generate revenues primarily from premiums we receive from the states in which we operate to provide health benefits to our members. We receive a fixed premium per member per month pursuant to our state contracts. We generally receive premiums during the month we provide services and recognize premium revenue during the period in which we are obligated to provide services to our

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members. We generate services revenues for providing services on a non-risk basis to SSI members through our Medicaid managed care organizations and for providing behavioral health, nurse triage and pharmacy compliance services to other healthcare entities.

     Premiums collected in advance are recorded as unearned premiums. Premiums due to us are recorded as premium and related receivables and are recorded net of an allowance based on historical trends and management’s judgment on the collectibility of these accounts. As we generally receive premiums during the month in which services are provided, the allowance is typically not significant in comparison to total premium revenue and does not have a material impact on the presentation of our financial condition, changes in financial position or results of operations.

     The primary driver of our increasing revenues has been membership growth. We have increased our membership through internal growth and acquisitions. From September 30, 2002 to September 30, 2003, we increased our membership by 58%. The following table sets forth our membership by state:

     The following table sets forth our membership by line of business:

     Our membership increased by 41,000 members in Texas due to the purchase of Medicaid-related contract rights from HMO Blue Texas in the third quarter of 2003 and SCHIP contract rights from Texas Universities Health Plan in the third and fourth quarters of 2002. In addition, two competing plans exited the Austin, Texas market during 2002. As a result, our Texas plan increased its membership by an additional 28,000 lives in 2002. This increase includes 12,000 lives that we are managing for the state of Texas on an interim basis and that will become part of a re-procurement process scheduled for mid-2004. We entered the New Jersey market through our acquisition of UHP in December 2002. The remaining membership increases in our Wisconsin, Texas and Indiana markets resulted from additions to our provider network and growth in the number of Medicaid beneficiaries.

     OPERATING EXPENSES

     Our operating expenses include medical costs, cost of services, and general and administrative expenses.

     Our medical costs include payments to physicians, hospitals, and other providers for healthcare and specialty product claims. Medical costs also include estimates of medical expenses incurred but not yet reported, or IBNR. Monthly, we estimate our IBNR based on a number of factors, including inpatient hospital utilization data and prior claims experience. As part of this review, we also consider the costs to process medical claims, and estimates of amounts to cover uncertainties related to fluctuations in physician billing patterns, membership, products and inpatient hospital trends. These estimates are adjusted as more information becomes available. We utilize the services of independent actuarial consultants who are contracted to review our estimates quarterly. While we believe that our process for estimating IBNR is actuarially sound, we cannot assure you that healthcare claims costs will not materially differ from our estimates.

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     Our results of operations depend on our ability to manage expenses related to health benefits and to accurately predict costs incurred. Our health benefits ratio represents medical costs as a percentage of premium revenues and reflects the direct relationship between the premium received and the medical services provided. The table below depicts our health benefits ratios by member category and in total:

     While our core Medicaid business remained consistent between periods, the addition of the SSI members in New Jersey in December 2002 has caused our heath benefits ratio for the nine months ended September 30, 2003 to increase. The health benefits ratio for SSI is affected by a low membership base, which subjects us to volatility. We expect the health benefits ratio for SSI to decrease as these members become fully integrated into our medical management programs, as our membership base grows within the state of New Jersey and as our membership base grows in other markets.

     Our cost of services expenses include all direct costs to support the local functions responsible for generation of our services revenues. These expenses primarily consist of the salaries and wages of the physicians, clinicians, therapists and teachers who provide the services and expenses related to the clinics and supporting facilities and equipment used to provide services.

     Our general and administrative expenses primarily reflect wages and benefits and other administrative costs related to health plans and our centralized functions that support all of our business units. The major centralized functions are claims processing, information systems, finance, medical management support, provider contracting support, human resources and administration. Our general and administrative expenses ratio represents general and administrative expenses as a percentage of total revenues and reflects the relationship between revenues earned and the costs necessary to drive those revenues. The following table sets forth the general and administrative expenses ratios by business segment and in total:

		OTHER INCOME (EXPENSE)
		Other income (expense) consists principally of investment income and interest expense.
		-      Investment income is derived from our cash, cash equivalents and investments. Information about our investments is included below under “Liquidity and Capital Resources.”
		-      Interest expense primarily reflects mortgage interest on our corporate headquarters building and non-use fees paid to a bank in conjunction with our revolving credit facility.

RESULTS OF OPERATIONS

		NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2002
		Revenues
		Premiums for the nine months ended September 30, 2003 increased $235.5 million, or 73.7%, to $554.9 million from $319.4

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million for the comparable period in 2002. This increase was due to organic growth in our existing markets, changes in our member mix by product category, the purchase of the Texas contracts and the addition of our New Jersey membership through our acquisition of UHP. In addition, we received weighted average rate increases effective January 1, 2003 of 1.0% in Indiana and 4.3% in Wisconsin; effective July 1, 2003 of 6.2% in New Jersey; and effective September 1, 2003 of 7.5% in Texas.

     Services revenues for the nine months ended September 30, 2003 increased $6.8 million to $7.1 million from $320,000 for the comparable period in 2002. This increase resulted from the addition of GPA services revenues since March 1, 2003 and increases in our non-risk SSI membership in our Texas market.

     Operating Expenses

     Medical costs for the nine months ended September 30, 2003 increased $197.3 million, or 75.1%, to $460.0 million from $262.7 million for the comparable period in 2002. This increase primarily reflected the growth in our membership as described above.

     Cost of services for the nine months ended September 30, 2003 increased $6.0 million to $6.3 million from $252,000 for the comparable period in 2002. This increase was due primarily to the inclusion of direct costs related to the services revenues of GPA since March 1, 2003.

     General and administrative expenses for the nine months ended September 30, 2003 increased $27.9 million, or 80.1%, to $62.7 million from $34.8 million for the comparable period in 2002. This increase reflected a higher level of wages and related expenses for additional staff to support our membership growth and expanding markets. In addition, facilities charges and related expenses have increased to support our increased membership.

     Other Income (Expense)

     Other income (expense) for the nine months ended September 30, 2003 decreased $5.3 million, or 60.9%, to $3.4 million from $8.6 million for the comparable period in 2002. Our 2002 results of operations included a one-time dividend of $5.1 million from a captive insurance company in which we maintained an investment. Excluding this one-time gain, other income was essentially flat with higher investment balances in 2003 offset by a lower interest rate environment.

     Income Tax Expense

     For the nine months ended September 30, 2003, we recorded income tax expense of $13.8 million based on a 37.8% effective tax rate. For the nine months ended September 30, 2002, we recorded income tax expense of $11.8 million based on an effective tax rate of 38.6%. Our effective tax rate decreased period over period due to our utilization of net operating loss carryforwards obtained with certain of our acquisitions.

     THREE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2002

     Revenues

     Premiums for the three months ended September 30, 2003 increased $79.5 million, or 68.4%, to $195.8 million from $116.3 million for the comparable period in 2002. This increase was due to organic growth in our existing markets, changes in our member mix by product category, the purchase of the Texas contracts and the addition of our New Jersey membership through our acquisition of UHP. In addition, we received weighted average rate increases effective January 1, 2003, of 1.0% in Indiana and 4.3% in Wisconsin; effective July 1, 2003 of 6.2% in New Jersey; and effective September 1, 2003 of 7.5% in Texas.

     Services revenues for the three months ended September 30, 2003 increased $2.5 million to $2.6 million from $109,000 for the comparable period in 2002. This increase resulted from the addition of GPA services revenues which we acquired March 1, 2003 and increases in our non-risk SSI membership in our Texas market.

     Operating Expenses

     Medical costs for the three months ended September 30, 2003 increased $65.0 million, or 68.0%, to $160.7 million from $95.6 million for the comparable period in 2002. This increase primarily reflected the growth in our membership as described above.

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Medical costs as a percentage of premium revenue were lower in the three months ended September 30, 2003 partially due to a distribution from an escrow account for costs incurred prior to our acquisition of UHP.

     Cost of services for the three months ended September 30, 2003 increased $2.6 million to $2.7 million from $84,000 for the comparable period in 2002. This increase was due primarily to the inclusion of direct costs related to the services revenue of GPA.

     General and administrative expenses for the three months ended September 30, 2003 increased $9.8 million, or 77.3%, to $22.4 million from $12.6 million for the comparable period in 2002. This increase reflected a higher level of wages and related expenses for additional staff to support our membership growth and expanding markets. In addition, facilities charges and related expenses have increased to support our increased membership.

     Other Income (Expense)

     Other income (expense) for the three months ended September 30, 2003 decreased $5.6 million, or 82.6%, to $1.2 million from $6.8 million for the comparable period in 2002. Our 2002 results of operations included a one-time dividend of $5.1 million from a captive insurance company in which we maintained an investment. Excluding this one-time gain, other income decreased $500,000 with a lower interest rate environment partially offset by higher investment balances in 2003.

     Income Tax Expense

     For the three months ended September 30, 2003, we recorded income tax expense of $5.1 million based on a 37.0% effective tax rate. For the three months ended September 30, 2002, we recorded income tax expense of $5.5 million based on an effective tax rate of 37.3%. Our effective tax rate decreased period over period due to our utilization of net operating loss carryforwards obtained with certain of our acquisitions.

LIQUIDITY AND CAPITAL RESOURCES

     On August 13, 2003, we closed our follow-on public offering of 3,450,000 shares of common stock, including the underwriters over-allotment option, exercised on August 11, 2003, at $25.00 per share. We received net proceeds totaling $81.4 million from the follow-on offering. We intend to use our net proceeds for working capital and other general corporate purposes, which may include acquisitions of businesses, assets and technologies that are complementary to our business. We may use proceeds to acquire Medicaid and SCHIP businesses, specialty services businesses and contract rights in order to increase our membership and to expand our business into new service areas.

     Our operating activities provided cash of $22.3 million for the nine months ended September 30, 2003 compared to $22.1 million for the nine months ended September 30, 2002. This slight increase was due to continued profitability and an increase in membership, offset by an increase in premium and related receivables.

     Our investing activities used cash of $108.6 million for the nine months ended September 30, 2003 and $65.6 million for the comparable period in 2002. Our investment policies are designed to provide liquidity, preserve capital and maximize total return on invested assets within our investment guidelines. Net cash provided by and used in investing activities will fluctuate from year to year due to the timing of investment purchases, sales and maturities. As of September 30, 2003, our investment portfolio consisted primarily of fixed-income securities with an average duration of 3.2 years. Cash is invested in investment vehicles such as municipal bonds, commercial paper, and instruments of U.S. government-backed agencies and the U.S. Treasury. The states in which we operate prescribe the types of instruments in which our subsidiaries may invest their cash. The average annualized portfolio yield was 4.5% for the nine months ended September 30, 2003 and 6.9% for the year ended December 31, 2002 (exclusive of a one-time dividend of $5.1 million from a captive insurance company in which we maintained an investment). Our yield decreased due to a decrease in the overall interest rate environment.

     Our financing activities provided cash of $89.5 million for the nine months ended September 30, 2003 and $10.7 million for the nine months ended September 30, 2002. Cash provided by financing activities for the nine months ended September 30, 2003 was primarily due to the proceeds from the issuance of common stock through our follow-on public offering completed in August 2003. Cash provided by financing activities for the nine months ended September 30, 2002 was primarily due to the proceeds from the issuance of common stock through a follow-on public offering completed in May 2002.

     Our capital expenditures consist primarily of new software, software and hardware upgrades, and furniture, equipment and

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leasehold improvements related to office and market expansions. We purchased $3.7 million of capital assets during the nine months ended September 30, 2003, and we anticipate spending $3.0 million for additional capital expenditures during the remainder of 2003 on office and market expansions, system upgrades, facilities renovations and a mail distribution center.

     In July 2003, we purchased the building in which our corporate headquarters in Saint Louis, Missouri are located for an aggregate purchase price of $12.6 million. We financed a portion of the purchase price through an $8.0 million non-recourse mortgage loan arrangement. The mortgage bears interest at the prevailing prime rate less .25%. At September 30, 2003, our mortgage bore interest at 3.75%.

     Our principal contractual obligations at September 30, 2003 consisted of obligations under operating leases and mortgage obligations for our corporate headquarters purchase. The significant non-cancelable lease and mortgage payments over the next five years and beyond are as follows (in thousands):

and rules could, among other things: