SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

For the quarter ended December 31, 2004

or

For this transition period from                     to                    

Commission file number 0-19291

CORVEL CORPORATION

     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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

YES þ NO o

     The number of shares outstanding of the registrant’s Common Stock, $0.0001 Par Value, as of December 31, 2004 was 10,307,557.

CORVEL CORPORATION
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS

Part I — Financial Information

Item 1. Financial Statements

CORVEL CORPORATION

See accompanying notes to consolidated financial statements.

CORVEL CORPORATION

See accompanying notes to consolidated financial statements.

CORVEL CORPORATION

See accompanying notes to consolidated financial statements.

CORVEL CORPORATION

See accompanying notes to consolidated financial statements.

CORVEL CORPORATION

Note A — Basis of Presentation

     The unaudited financial statements herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. The accompanying interim financial statements have been prepared under the presumption that users of the interim financial information have either read or have access to the audited financial statements for the latest fiscal year ended March 31, 2004. Accordingly, footnote disclosures which would substantially duplicate the disclosures contained in the March 31, 2004 audited financial statements have been omitted from these interim financial statements.

     Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation have been included. Operating results for the three and nine months ended December 31, 2004, are not necessarily indicative of the results that may be expected for the year ending March 31, 2005. For further information, refer to the consolidated financial statements and footnotes thereto for the year ended March 31, 2004 included in the Company’s Annual Report on Form 10-K.

Note B — Stock Based Compensation

     The Company has various stock-based employee compensation plans that are described more fully in Note E to the Consolidated Financial Statements, in the fiscal year ended March 31, 2004 Annual Report on Form 10-K. The Company accounts for these plans using the intrinsic value method under APB Opinion No. 25, “Accounting for Stock Issued to Employees” and related Interpretations. No stock-based employee compensation cost is included in net income for the three or nine month period ended December 31, 2003 or 2004 as all options granted under these plans had an exercise price equal to the market value of the underlying common stock on the date of grant.

     The following table illustrates the effect on net income and net income per share as if the Company had applied the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” to all outstanding and unvested awards in each three and nine month period ended December 31:

CORVEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004 (Unaudited)

Note B — Stock Based Compensation (continued)

     In December 2004, the Financial Accounting Standards Board issued a revision to SFAS 123 which eliminated the Company’s ability to elect to show the compensation expense as a pro-forma number in a footnote to the financial statements, effective for all interim or annual periods beginning after June 15, 2005. Beginning with the interim period ending September 30, 2005, the Company will be required to recognize the compensation expense from stock options using the fair value method and the related income tax benefit on the Company’s income statements and earnings per share rather than show these numbers on a pro-forma basis in the footnotes.

Note C — Stock Repurchase Plan

     The Company’s Board of Directors approved the commencement of a share repurchase program in the fall of 1996. In February 2005, the Company’s Board of Directors approved a 1,000,000 share expansion to its existing stock repurchase plan, increasing the total number of shares approved for repurchase to 7,100,000 shares from 6,100,000 shares. The repurchase program does not have a set expiration date. Since the commencement of the share repurchase program, the Company has spent $107 million to repurchase 5,959,468 shares of its common stock, equal to 37% of the outstanding common stock had there been no repurchases. The average price of these repurchases is $17.94 per share. During the nine months ended December 31, 2004, the Company repurchased 386,040 shares for $10,644,115. These purchases have been funded from the net earnings of the Company, along with the proceeds from the exercise of common stock options, the employee stock purchase plan and related income tax benefits from the exercise of these options. CorVel has 10,307,557 shares of common stock outstanding as of December 31, 2004, after reduction for the 5,959,468 shares in treasury.

Note D — Business Acquisitions

     In June 2003, the Company acquired 100% of the stock of Scan One, a document imaging company which is being integrated in the Company’s network solutions operations. The Company paid $3.7 million in cash for all of the common stock of Scan One and assumed certain outstanding obligations in the acquisition. The Company recorded $3.2 million of goodwill in connection with the acquisition. There are no contingent obligations in the price for this acquisition.

     The following table summarizes the recorded value of the Scan One assets acquired and liabilities assumed:

CORVEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004 (Unaudited)

Note D — Business Acquisitions (continued)

     The following unaudited pro forma summary presents information as if the aforementioned acquisition had been completed as of April 1, 2003, the beginning of fiscal 2004. The pro forma information does not necessarily reflect the actual results that would have occurred nor is it necessarily indicative of future results of operations of the combined companies.

Note E — Weighted Average Shares and Net Income Per Share

     Weighted average basic shares decreased from 10,559,000 for the quarter ended December 31, 2003 to 10,395,000 for the quarter ended December 31, 2004. Weighted average diluted shares decreased from 10,794,000 for the quarter ended December 31, 2003 to 10,510,000 for the quarter ended December 31, 2004. Weighted average basic shares decreased from 10,592,000 for the nine months ended December 31, 2003 to 10,488,000 for the nine months ended December 31, 2004. Weighted average diluted shares decreased from 10,855,000 for the nine months ended December 31, 2003 to 10,604,000 for the nine months ended December 31, 2004. The net decrease in each of these weighted share calculations is due to the repurchase of common stock as noted above offset by an increase in shares outstanding due to the exercise of stock options in the Company’s employee stock option plan and employee stock purchase plan. Additionally, the weighted average diluted shares decreased by a greater amount than the basic shares due to the decrease in the Company’s average stock price for the quarter ended December 31, 2004 compared to the quarter ended December 31, 2003 and its impact on applying the treasury stock method for outstanding options.

CORVEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004 (Unaudited)

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

     Earnings per common and common equivalent shares were computed by dividing net income by the weighted average number of shares of common stock and common stock equivalents outstanding during the quarter. The calculations of the basic and diluted weighted shares for the three and nine months ended December 31, 2003 and 2004, are as follows:

CORVEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004 (Unaudited)

Note F — Shareholder Rights Plan

     During fiscal 1997, the Company’s Board of Directors approved the adoption of a Shareholder Rights Plan. The Rights Plan provides for a dividend distribution to CorVel stockholders of one preferred stock purchase “Right” for each outstanding share of CorVel’s common stock. The Rights are designed to assure that all stockholders receive fair and equal treatment in the event of any proposed takeover of the Company and to encourage a potential acquirer to negotiate with the Board of Directors prior to attempting a takeover.

     Each Right entitles the registered holder to purchase from the Company, upon the occurrence of a certain event or events, one one-hundredth of a share of Series A Preferred at an exercise price of $118 (the “Purchase Price”), subject to certain adjustments. In addition, under certain circumstances, the Rights may become exercisable for a number of Common Shares having a value equal to two times the Purchase Price and/or common stock of certain acquiring companies having a value equal to two times the Purchase Price. Under certain circumstances, each Right may be exchanged by the Board at an exchange rate of one share of Common Stock (or a fraction of a share of the Preferred Stock having equivalent market value) per Right. Also, under certain circumstances, the Company may redeem the Rights in whole, but not in part, at a price of $.01 per Right. The Rights will not be exercisable until the occurrence of certain takeover-related events. The issuance of the Rights has no dilutive effect on the Company’s earnings per share.

     In April 2002, the Company’s Board of Directors approved an amendment to its existing stockholder rights agreement to: (1) extend the expiration date of the rights to February 10, 2012, (2) increase the initial exercise price of each right from $42 to $118 and (3) enable Fidelity Management & Research Company and its affiliates to purchase up to 18% of the shares of common stock of the Company without triggering the stockholder rights. The limitations under the Rights Agreement remain in effect for all other stockholders of the Company.

Note G — Stock Option Plans

     Under the Company’s Restated 1988 Executive Stock Option Plan, (“the Plan”), as amended, options for up to 5,955,000 shares of the Company’s common stock may be granted at prices not less than 85% of the fair value of the underlying stock on the date of grant as determined by the Board. Options granted under the Plan may be either incentive stock options or non-statutory stock options and options granted generally have a maximum life of five years. All options granted in the three months ended December 31, 2003 and December 31, 2004 were granted at fair market value and are non-statutory stock options. Summarized information for all stock options for the nine months ended December 31, 2003 and December 31, 2004 follows:

CORVEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004 (Unaudited)

Note H — Accrued Liabilities

Accrued liabilities consist of the following at March 31, 2004 and December 31, 2004:

Note I — Employee Stock Purchase Shares

     Shares issued to employees under the Company’s employee stock purchase plan for the nine months ended December 31, 2003 and 2004, were 19,297 and 20,055, respectively. The Company received proceeds of $534,000 and $556,000, respectively, from shares issued under the employee stock purchase plan for the nine months ended December 31, 2003 and 2004. There were no shares issued under the Company’s Employee Stock Purchase Plan during the quarters ended December 31, 2003 and 2004.

Note J — Contingencies

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

Item 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

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

Overview

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

Network Solutions Services

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

Patient Management Services

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

Organizational Structure

     The Company’s management is structured geographically with Regional Vice Presidents who report to the President of the Company. Each of these Regional Vice Presidents is responsible for all services provided by the Company in his or her particular region and for the operating results of the Company in multiple states. These Regional Vice Presidents have Area and District Managers who are also responsible for all services provided by the Company in their given area and district.

Business Enterprise Segments

     We operate in one reportable operating segment, managed care. The Company’s services are delivered to its customers through its local offices in each region and financial information for the Company’s operations follows this service delivery model. All regions provide the Company’s patient management and network solutions services. Statement of Financial Accounting Standards, or SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” establishes standards for the way that public business enterprises report information about operating segments in annual consolidated financial statements. The Company’s internal financial reporting is segmented geographically, as discussed above, and managed on a geographic rather than service line basis, with virtually all of the Company’s operating revenue generated within the United States.

     Under SFAS 131, two or more operating segments may be aggregated into a single operating segment for financial reporting purposes if aggregation is consistent with the objective and basic principles of SFAS 131, if the segments have similar economic characteristics, and if the segments are similar in each of the following areas: 1) the nature of products and services; 2) the nature of the production processes; 3) the type or class of customer for their products and services; and 4) the methods used to distribute their products or provide their services. We believe each of the Company’s regions meet these criteria as they provide the similar services to similar customers using similar methods of productions and similar methods to distribute their services.

Summary of Quarterly Results

     The Company continues to be negatively impacted by a soft workers’ compensation claims market due to the continued softness in the economy’s manufacturing sector. In addition, a shortage of nurses has caused an increase in case management hourly costs, which have increased at a greater rate than the rate at which management has been able to pass along these hourly rate increases to customers. The Company’s quarterly results were also adversely impacted by fewer business days in the quarter. There were 62 business days in the quarter ended December 31, 2004 compared with 64 business days for the quarter ended September 30, 2004 and 63 days in the quarter ended December 31, 2003. Revenues for the quarter ended September 30, 2004 were $72.2 million, or $1.12 million per day, which were equal to the $1.12 million per day in the quarter ended December 31, 2004.

     During the quarter ended December 31, 2004, the Company generated revenues of $69.8 million, a decrease of $5.8 million or 7.7% from revenues of $75.6 million for the quarter ended December 31, 2003. Approximately $3.0 million of the decrease in revenues was attributed to a reduction in the Company’s patient management services due to a decrease in patient management referrals primarily due to the soft workers’ compensation claims market as noted above. The remainder of the decrease was attributable to provider program revenues which also declined due to a decrease in the amount of bill volume processed and referrals for MRI scheduling services.

     During the quarter, the Company continued to adjust its workforce to match the changing mix of services being delivered.

     The decreases in quarterly revenue reflect the more challenging market conditions and there is no guarantee that the Company will either generate revenue growth similar to previous periods and may, in the short term, experience year over year revenue decreases. The decline in the nation’s manufacturing employment levels which

has helped lead to a decline in national workers’ compensation claims, considerable price competition in a flat-to-declining overall market, an increase in competition from both larger and smaller competitors, changes and potential changes in state workers’ compensation and auto managed care laws which can reduce demand for the Company’s services, have created an environment where revenue and margin growth is more difficult to attain and where revenue growth is less certain than historically experienced. Additionally, the Company’s technology and preferred provider network competes against other companies, some of which have more resources available. Also, some customers may manage their managed care services in-house and may reduce the amount of services which are outsourced to managed care companies such as CorVel Corporation.

     With a challenging revenue environment, the Company will need to manage both field and general and administrative costs in order to maintain its historical operating margin percentages.

Business Acquisition During Fiscal Year Ended March 31, 2004

     In June 2003, the Company expanded its existing office automation service line with the acquisition of Scan One, a provider of scanning, optical character recognition and document management services. The acquisition provided the opportunity to sell scanning and document management, the services of Scan One, through a number of the Company’s larger offices. The Company believes these services are synergistic with the Company’s medical bill review processing. The Company has made no business acquisitions during the fiscal year ending March 31, 2005.

Results of Operations

     The Company derives its revenues from providing patient management and network solutions services to payors of workers’ compensation benefits, auto insurance claims, and health insurance benefits. Patient management services include utilization review, medical case management, and vocational rehabilitation. Network solutions revenues include fee schedule auditing, hospital bill auditing, independent medical examinations, diagnostic imaging review services, and preferred provider referral services. The percentages of revenues attributable to patient management and network solutions services for the quarters ended December 31, 2003 and December 31, 2004:

     The following tables set forth, for the periods indicated, the dollars and the percentage of revenues represented by certain items reflected in the Company’s consolidated statements of income. The Company’s past operating results are not necessarily indicative of future operating results.

Revenues

     Three Months Ended December 31, 2003 and 2004

     Revenues decreased from $75.6 million for the three months ended December 31, 2003 to $69.8 million for the three months ended December 31, 2004, a decrease of $5.8 million or 7.7%. Approximately $3.0 million of the decrease in revenues was attributed to a reduction in the Company’s patient management services due to a decrease in patient management referrals primarily due to the soft workers’ compensation claims market as noted above. The remainder of the decrease was attributable to provider program revenues which also declined due to a decrease in the amount of bill volume processed and referrals for MRI scheduling services. The continued softness in the national labor market, especially the manufacturing sector of the economy, has caused a reduction in the overall claims volume. Additionally, the competitive environment in the marketplace has made it difficult to generate revenue increases without unit volume increases.

     Nine Months Ended December 31, 2003 and 2004

     Revenues decreased from $228.5 million for the nine months ended December 31, 2003 to $218.2 Million for the nine months ended December 31, 2004, a decrease of $10.3 million or 4.5%. Approximately $7.5 million of this decrease was attributable to the decrease in revenue from the Company’s patient management services primarily due to a decrease in the patient management referrals received by the Company. The decrease was primarily due to a continued softness in the national labor market, especially the manufacturing sector of the economy. The Company has been negatively impacted by a reduction in the overall claims volume due to employers implementing workplace safety programs. Employers have also been more aggressive in seeking early intervention services which the Company and the Company’s competitors offer, decreasing the length of a claim and decreasing the need for on-site case management services.

Cost of Revenues

     The Company’s cost of revenues consist of direct expenses, costs directly attributable to the generation of revenue, and field indirect costs which are incurred in the field to support the operations in the field offices which generate the revenue. Direct costs are primarily case manager salaries, bill review analysts, related payroll taxes and fringe benefits, and costs for IME (independent medical examination) and MRI providers. Most of the Company’s revenues are generated in offices which provide both patient management services and network solutions services. The largest of the field indirect costs are manager salaries and bonus, account executive base pay and commissions, administrative and clerical support, field systems personnel, PPO network developers, related payroll taxes and fringe benefits, office rent, and telephone expense. Over 42% of the costs incurred in the field are field indirect costs which support both the patient management services and network solutions operations of the Company’s field operations.

Change in Cost of Revenue

     Three Months Ended December 31, 2003 and 2004

     The Company’s cost of revenues decreased by 3.3% or $2.1 million from $63.0 million for the three months ended December 31, 2003 to $60.9 million for the three months ended December 31, 2004. This decline is partly due to a decrease in revenue resulting in less direct labor related expenses of $1.1 million. Field direct salaries decreased from $17.2 million in the quarter ended December 31, 2003 to $16.5 million in the quarter ended December 31, 2004, a decrease of $0.7 million. Additionally, the Company paid $1.3 million less for services for diagnostic imaging and the Company’s CorCare RX services due to a reduction in the volume of services provided.

     The cost of revenues as a percentage of revenues for the three months ended December 31, 2003 was 83.3% compared to 87.2% for the three months ended December 31, 2004. This increase was primarily due to the Company’s inability to reduce its field costs as much as the revenue decreased in the quarter. The Company is in the process of managing a reduction of these costs to be more in line with the Company’s revenue trends.

     Nine Months Ended December 31, 2003 and 2004

     The Company’s cost of revenues decreased by 2.2% or $4.1 million from $188.8 million for the nine months ended December 31, 2003 to $184.7 million for the nine months ended December 31, 2004. The decrease was primarily due to reduction in direct labor costs of $2.9 million resulting from the Company’s efforts to adjust its workforce to better match the changing volume of services being delivered.

     The cost of revenues as a percentage of revenues for the nine months ended December 31, 2003 was 82.6% compared to 84.6% for the nine months ended December 31, 2004. While the Company was able to reduce employment related expenses, the reduction did not occur at the same pace as the change in revenues. The Company is working to manage labor costs to better match the changing volume of services being delivered.

General and Administrative Costs

     Approximately 63% of the General and administrative costs consists of corporate systems costs, which include the corporate systems support, implementation and training, amortization of software development costs, depreciation of the hardware costs in the Company’s national systems, the Company’s national wide area network, and other systems related costs. The remaining 37% of the general and administrative costs consist of national marketing, national sales support, corporate legal, corporate insurance, human resources, accounting, product management, new business development, and other general corporate expenses.

Change in General and Administrative Costs

     Three Months Ended December 31, 2003 and 2004

     General and administrative expense increased from $6.5 million in the three months ended December 31, 2003 or 8.6% of revenues to $6.9 million or 9.8% of revenues for the three months ended December 31, 2004. This increase was due primarily to an increase in systems costs, including depreciation and software development costs. Additionally, the Company experienced increased costs for information services staff to support the Company’s implementation of Care^MC, further electronic data interface capabilities as required by customer needs, increased enhancement of the Company’s corporate data center, and the development of a backup data center.

     Nine Months Ended December 31, 2003 and 2004

     General and administrative expense increased from $19.3 million in the nine months ended December 31, 2003, or 8.5% of revenues, to $21.0 million in the nine months ended December 31, 2004, or 9.6% of revenues. Most of this increase was due to the increase in systems costs as noted above, from the Company’s business continuity planning and the second data center which is our fail over disaster recovery site and also hosts certain CorVel applications.

Income Tax Provision

     Three Months Ended December 31, 2003 and 2004

     The Company’s income tax expense decreased from $2.0 million for the three months ended December 31, 2003 to $0.8 million for the three months ended December 31, 2004 due to the decrease in the amount of income before income taxes from $6.1 million to $2.0 million for the same periods, respectively. The income tax expense as a percentage of income before income taxes increased from 33.3% for the three months ended December 31, 2003 to 38.5% for the three months ended December 31, 2004. This increase was a result of revisions to the Company’s estimated annual income tax rate during the quarter ended December 31, 2003. This rate differed from the statutory federal tax rate of 35.0% primarily due to state income taxes and certain non-deductible expenses.

     Nine Months Ended December 31, 2003 and 2004

     The Company’s income tax expense for the nine months ended December 31, 2003 and 2004 was $7.4 million and $4.8 million, respectively. The decrease in the amount of income taxes was primarily attributable to a decrease in income before income tax, which was $20.3 million and $12.5 million for the nine months ended December 31, 2003 and 2004, respectively. The income tax expense as a percentage of income before income taxes increased from 36.6% for the nine months ended December 31, 2003 to 38.5% for the nine months ended December 31, 2004. This increase was a result of revisions to the Company’s estimated annual income tax rate during the quarter ended December 31, 2003. This rate differed from the statutory federal tax rate of 35.0% primarily due to state income taxes and certain non-deductible expenses.

Liquidity and Capital Resources

     The Company has historically funded its operations and capital expenditures primarily with cash flow from operations, and to a lesser extent, option exercises. Net working capital decreased from $41 million as of March 31, 2004 to $39 million as of December 31, 2004, primarily due to a decrease in accounts receivable from $45.5 million as of March 31, 2004 to $42.6 million as of December 31, 2004. Cash increased from $8.6 million at March 31, 2004 to $10.5 million at December 31, 2004.

     Management believes that cash from operations, available funds under a line of credit, and funds from exercise of stock options granted to employees are adequate to fund existing obligations, repurchase shares of the Company’s common stock, introduction of new services, and continued development of healthcare related businesses. The Company regularly evaluates cash requirements for current operations and commitments, and for capital acquisitions and other strategic transactions. The Company may elect to raise additional funds for these purposes, either through debt or additional equity, the sale of investment securities or otherwise, as appropriate, but cannot guarantee that such capital will be available when needed or at all, or on reasonable terms.

     As of December 31, 2004, the Company had $10.5 million in cash and cash equivalents, invested primarily in short-term, highly liquid investments with maturities of 90 days or less.

     In April 2003, the Company entered into a credit agreement with a financial institution to provide borrowing capacity of up to $5 million. Currently, this agreement expires in September 2005. Borrowings under this agreement bear interest, at the Company’s option, at a fluctuating LIBOR-based rate (3.10% at December 31, 2004) plus 1.25% or at the financial institution’s prime lending rate (5.0% at December 31, 2004). There were no outstanding borrowings against this line of credit at either March 31, 2004 or December 31, 2004. The line of credit includes covenants that require the Company to maintain a quick ratio of at least 2:1, a tangible net equity of at least $45 million and have positive net income.

     The following table summarizes the contractual obligations the Company has outstanding as of December 31, 2004:

     The Company has historically required substantial capital to fund the growth of its operations, particularly working capital to fund the growth in accounts receivable and capital expenditures. The Company believes that the cash balance at December 31, 2004 along with anticipated internally generated funds and the available line of credit are sufficient to meet the expected cash requirements for at least the next twelve months.

Operating Cash Flows

Nine months ended December 31, 2003 compared to nine months ended December 31, 2004

     Net cash provided by operating activities was $22.2 million in the nine months ended December 31, 2003 compared to $19.6 million in the nine months ended December 31, 2004. This decrease was primarily due to a decrease in net income by $5.2 million from $12.9 million for the nine months ended December 31, 2003 to $7.7 million for the nine months ended December 31, 2004. As net income decreased during the period, cash provided by operating activities decreased. The decrease in cash flow from operations was not as great as the decrease in net income as a decrease in accounts receivable generated nearly $3 million in cash flow. In addition, approximately $1.0 million of the decrease in net income for the period resulted from increased depreciation.

Investing Activities

Nine months ended December 31, 2003 compared to the nine months ended December 31, 2004

     Net cash flow used in investing activities decreased from $13.5 million in the nine months ended December 31, 2003 to $9.0 million in the nine months ended December 31, 2004. This decrease was primarily attributable to $3.7 million of investment for acquisitions during the nine months ended December 31, 2003 with no comparable acquisitions during the nine months ended December 31, 2004. Additions to property and equipment decreased from $9.8 million during the nine months ended December 31, 2003 to $8.9 million during the nine months ended December 31, 2004 as the Company’s revenue growth has slowed and started to decrease in the two most recent quarters. Management expects capital expenditures to remain comparable to current levels.

Financing Activities

Nine months ended December 31, 2003 compared to the nine months ended December 31, 2004

     Net cash flow used in investing activities increased from $8.4 million in the nine months ended December 31, 2003 to $8.8 million in the nine months ended December 31, 2004 primarily due to a decrease in the amount of cash generated from the exercise of stock options from $2.2 million in the nine months ended December 31, 2003 to $1.9 million in the nine months ended December 31, 2004. The Company spent $10.6 million to repurchase its common stock in both the nine months ended December 31, 2003 and December 31, 2004. Management expects that repurchases of common stock will continue. As discussed in note C above, in February 2005, the Company’s Board of Directors approved a 1,000,000 share expansion to its existing stock repurchase plan, increasing the total number of shares approved for repurchase to 7,100,000 shares from 6,100,000 shares.

Critical Accounting Policies

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

     The following is not intended to be a comprehensive list of our accounting policies. Our significant accounting policies are more fully described in Note A to the annual Consolidated Financial Statements for the year ended March 31, 2004 included in the Company’s Form 10-K. In many cases, the accounting treatment of a particular transaction is specifically dictated by accounting principles generally accepted in the United States of America, with no need for management’s judgment in their application. There are also areas in which management’s judgment in selecting an available alternative would not produce a materially different result.

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

     Revenue Recognition: The Company’s revenues are recognized primarily as services are rendered based on time and expenses incurred. A certain portion of the Company’s revenues are derived from fee schedule auditing which is based on the number of provider charges audited and, to a lesser extent, on a percentage of savings achieved for the Company’s clients. This follows the guidance of Staff Accounting Bulletin 104 in recognizing revenue when: 1) persuasive evidence of an arrangement exists, 2) services have been rendered, 3) the seller’s price to the buyer is fixed or determinable, and 4) collectibility is reasonably assured.

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

     Valuation of Long-lived Assets: We assess the impairment of identifiable intangibles, property, plant and equipment, goodwill and investments 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.

     When we determine that the carrying value of intangibles, long-lived assets and related goodwill may not be recoverable based upon the existence of one or more of the above indicators of impairment, an impairment is recognized. Such impairments, if any, are determined to exist when the expected future undiscounted cash flows derived from such assets are less than their carrying value, except for investments. We generally measure any impairment based on a projected discounted cash flow method using a discount rate determined by our management to be commensurate with the risk inherent in our current business model. A loss in the value of an investment will be recognized when it is determined that the decline in value is other than temporary. Any change in the estimated discount rate or estimated cash flows could affect the evaluation of the impairment and potentially the income statement.

     Accrual for Self-insurance Costs: The Company self-insures for the group medical costs and workers’ compensation costs of its employees. The Company purchases stop loss insurance for large claims. Management believes that the self-insurance reserves are appropriate; however, actual claims costs may differ from the original estimates requiring adjustments to the reserves. Management determines the reserve amount through a process of reviewing historical trends and from review of information provided by our TPA’s.

     Accounting for Income Taxes: As part of the process of preparing our consolidated financial statements we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating our actual current tax expense together with assessing temporary differences resulting from differing treatment of items for tax and financial accounting purposes. These differences result in deferred tax assets and liabilities, which are included in our consolidated balance sheet. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not likely, we must establish a valuation allowance. If the Company was to establish a valuation allowance or increase this allowance in a period, the Company must include an expense within the tax provision in the consolidated income statement. Significant management judgment is required in determining our provision for income taxes and our deferred tax assets and liabilities.

Recently Issued Accounting Standards

     In December 2004, the Financial Accounting Standards Board issued a revision to SFAS 123 which eliminated the Company’s ability to elect to show the stock compensation expense as a pro-forma number in a footnote to the financial statements rather than include this amount on the income statement. Effective for all interim or annual periods beginning after June 15, 2005, the Company will be required to recognize the compensation expense from stock options using the fair value method and the related income tax benefit on the Company’s income statements and earnings per share calculation rather than show these numbers on a pro-forma basis in the footnotes. The effect of this revision on the Company’s historical income statements is disclosed in Footnote B to this Form 10-Q.

     In May of 2003, the Financial Accounting Standards Board (the Board), issued SFAS 150 Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity (SFAS 150). This Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments would previously have been classified as equity. This Statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatorily redeemable financial instruments of nonpublic entities. The Company has reviewed the provisions of SFAS 150, and management believes that it does not have any financial instruments requiring reclassifications under SFAS 150.

     In January 2003, the Board issued FASB Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities — an Interpretation of ARB No. 51, Consolidated Financial Statements. The Interpretation addresses how variable interest entities are to be identified and how an enterprise assesses its interests in a variable interest entity to decide whether to consolidate that entity. The Interpretation also requires existing unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the entities do not effectively disperse risks among the parties involved. FIN 46 is effective in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which a company holds a variable interest that is acquired before February 1, 2003. The provisions of FIN 46 have been reviewed, and management does not believe that it has any entities requiring consolidation.

     Risk Factors

     Certain statements contained in the Company’s Annual Report on Form 10-K for the year ended March 31, 2004, and Quarterly Report on Form 10-Q for the quarter ended December 31, 2004, including but not limited to statements concerning the development of new services, possible legislative changes, and other statements contained herein regarding matters that are not historical facts, are forward-looking statements, (as such term is defined in the Securities Act of 1933, as amended). Because such statements involve risks and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements.

     Past financial performance is not necessarily a reliable indicator of future performance, and investors in the Company’s common stock should not use historical performance to anticipate results or future period trends. Investing in the Company’s common stock involves a high degree of risk. Investors should consider carefully the following risk factors, as well as the other information in this report and the Company’s other filings with the Securities and Exchange Commission, including the Company’s consolidated financial statements and the related notes, before deciding whether to invest or maintain an investment in shares of the Company’s common stock. If any

of the following risks actually occurs, the Company’s business, financial condition and results of operations would suffer. In this case, the trading price of the Company’s common stock would likely decline. The risks described below are not the only ones the Company faces. Additional risks that the Company currently does not know about or that the Company currently believes to be immaterial also may impair the Company’s business operations.

     Changes in government regulations could increase the Company’s cost of operations and/or reduce the demand for the Company’s services.

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

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

     In addition, changes in workers’ compensation, auto, and managed health care laws or regulations may reduce demand for the Company’s services, require the Company to develop new or modified services to meet the demands of the marketplace or reduce the fees that the Company may charge for its services. One proposal which has been considered by Congress and certain state legislatures is 24-hour health coverage, in which the coverage of traditional employer-sponsored health plans is combined with workers’ compensation coverage to provide a single insurance plan for work-related and non-work-related health problems. Incorporating workers’ compensation coverage into conventional health plans may adversely affect the market for the Company’s services because some employers would purchase 24 hour coverage from group health plans which could reduce the demand for CorVel’s workers’ compensation customers.

     The Company experienced its first quarter of quarterly sequential revenue decline in the quarter ended December 31, 2004 and such revenue may continue to decline in the future. As a result, the Company may fail to meet or exceed the growth expectations of investors or securities analysts which could cause the Company’s stock price to decline.

     The Company’s quarterly sequential revenue may continue to decline in the future as a result of a variety of factors, many of which are outside of the Company’s control. If the Company’s quarterly sequential revenue growth declines at a greater rate than the expectations of investors or securities analysts, the price of the Company’s common stock could decline substantially. Fluctuation or declines in quarterly sequential revenue growth may be due to a number of factors, including, but not limited to, those listed below and identified throughout this “Risk Factors” section the decline in the manufacturing employment, the decline in workers’ compensation claims, the considerable price competition given the flat-to-declining market, the increase in competition, and the changes and the potential changes in state workers’ compensation and auto managed care laws which can reduce demand for the Company’s services. These factors create an environment where revenue and margin growth is more difficult to attain and where revenue growth is less certain than historically experienced. Additionally, the Company’s technology and preferred provider network face competition from companies that have more resources available to them than the Company does. Also, some customers may handle their managed care services in-house and may reduce the amount of services which are outsourced to managed care companies such as CorVel Corporation.

     These factors could cause the market price of the Company’s Common Stock to fluctuate substantially. Specifically, the year-to-year percentage growth in operating results for the Company’s four most recently completed fiscal years was lower than the growth rates historically experienced by the Company. The Company’s slower growth rate in those fiscal years was partially attributable to a reduction in the growth rate of healthcare expenditures nationally, contributing to a reduction in the growth of claims processed by the Company. There can be no assurance that the Company’s growth rate in the future, if any will be at or near historical levels. In the quarter ended December 31, 2004, the company did not grow and operating results declined compared to the quarter ended September 30, 2004.

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

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

     Exposure to possible litigation and legal liability may adversely affect the Company’s business, financial condition and results of operations.

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

     In addition, there can be no assurance that the Company will not be subject to other litigation that may adversely affect the Company’s business, financial condition or results of operations, including but not limited to being joined in litigation brought against the Company’s customers in the managed care industry. The Company maintains professional liability insurance and such other coverages as the Company believes are reasonable in light of the Company’s experience to date. There can be no assurance; however, that such insurance will be sufficient or available in the future at reasonable cost to protect the Company from liability which might adversely affect the Company’s business, financial condition or results of operations.

     The Company’s failure to compete successfully could make it difficult for the Company to add and retain customers and could reduce or impede the growth of the Company’s business.

     The Company faces competition from PPOs, TPAs, and other managed healthcare companies. The Company believes that as managed care techniques continue to gain acceptance in the workers’ compensation marketplace, CorVel’s competitors will increasingly consist of nationally focused workers’ compensation managed care service companies, insurance companies, HMOs, and other significant providers of managed care products. Legislative reforms in some states permit employers to designate health plans such as HMOs and PPOs to cover workers’ compensation claimants. Because many health plans have the ability to manage medical costs for workers’ compensation claimants, such legislation may intensify competition in the markets served by the Company. Many of the Company’s current and potential competitors are significantly larger and have greater financial and marketing resources than those of the Company, and there can be no assurance that the Company will continue to maintain its existing clients or its past level of operating performance or be successful with any new products or in any new geographical markets it may enter.

     Healthcare providers are becoming increasingly resistant to the application of certain healthcare cost containment techniques, which could cause the Company’s revenue to decrease.

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

A change in market dynamics may harm the Company’s results of operations.

     Within the past few years, several states have experienced a decline in the number of workers’ compensation claims and the average cost per claim which have been reflected in workers’ compensation insurance premium rate reductions in those states. The Company believes that declines in workers’ compensation costs in these states are due principally to intensified efforts by payors to manage and control claim costs, to improved risk management by employers and to legislative reforms. If declines in workers’ compensation costs occur in many states and persist over the long-term, they may have an adverse impact on the Company’s business, financial condition and results of operations.

     The Company provides an outsource service to payors of workers’ compensation and auto healthcare benefits. These payors include insurance companies, TPA’s, municipalities, state funds, and self-insured, self-administered employers. If these payors reduce the amount of work they outsource, the Company’s results of operations could be adversely affected.

     If the average annual growth in nationwide employment does not offset declines in the frequency of workplace injuries and illnesses, then the size of our market may decline and adversely affect our ability to grow.

     The rate of injuries that occur in the workplace has decreased over time. Although the overall number of people employed in the workplace has generally increased over time, this increase has only partially offset the declining rate of injuries and illnesses. Our business model is based, in part, on our ability to expand our relative share of the market for the treatment and review of claims for workplace injuries and illnesses. If nationwide employment does not increase or experiences periods of decline, or if workplace injuries and illnesses continue to decline at a greater rate than the increase in total employment, our ability to expand our revenue and earnings could be unfavorably impacted.

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

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

     The Company faces competition for staffing, which may increase its labor costs and reduce profitability.

     The Company competes with other health-care providers in recruiting qualified management and staff personnel for the day-to-day operations of its business, including nurses and other case management professionals. In some markets, the scarcity of nurses and other medical support personnel has become a significant operating issue to health-care providers. This shortage may require the Company to enhance wages to recruit and retain qualified nurses and other health-care professionals. During the quarter ended December 31, 2004, the company did incur increased hourly costs for nurses in many markets. The failure of the Company to recruit and retain qualified management, nurses and other health-care professionals or to control labor costs could have a material adverse effect on profitability.

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

     The Company is dependent to a substantial extent upon the continuing efforts and abilities of certain key management personnel. In addition, the Company faces competition for experienced employees with professional expertise in the workers’ compensation managed care area. The loss of, or the inability to attract, qualified employees, especially V. Gordon Clemons, Chairman and President, could have a material unfavorable effect on the Company’s business and results of operations.

     If the Company fails to manage its growth effectively, it may be unable to execute its business plan, maintain high levels of service or adequately address competitive challenges.

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

	•	an acquisition may negatively impact the Company’s results of operations because it may require incurring large one-time charges, substantial debt or liabilities; it may require the amortization or write down of amounts related to deferred compensation, goodwill and other intangible assets; or it may cause adverse tax consequences, substantial depreciation or deferred compensation charges;
	•	the Company may encounter difficulties in assimilating and integrating the business, technologies, products, services, personnel or operations of companies that are acquired, particularly if key personnel of the acquired company decide not to work for the Company;
	•	an acquisition may disrupt ongoing business, divert resources, increase expenses and distract management;
	•	the acquired businesses, products, services or technologies may not generate sufficient revenue to offset acquisition costs;
	•	the Company may have to issue equity securities to complete an acquisition, which would dilute stockholders and could adversely affect the market price of the Company’s common stock; and
	•	acquisitions may involve the entry into a geographic or business market in which the Company has little or no prior experience.

     There can be no assurance that the Company will be able to identify or consummate any future acquisitions or other strategic relationships on favorable terms, or at all, or that any future acquisition or other strategic relationship will not have an adverse impact on the Company’s business or results of operations. If suitable opportunities arise, the Company anticipates that it would finance such transactions, as well as its internal growth, through working capital or, in certain instances, through debt or equity financing. There can be no assurance, however, that such debt or equity financing would be available to the Company on acceptable terms when, and if, suitable strategic opportunities arise.

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

     We deploy our Care^MC and, to a lesser extent, MedCheck services over the Internet. Our ability to deliver our Internet-based services is dependent on the development and maintenance of the infrastructure of the Internet by third parties. This includes maintenance of a reliable network backbone with the necessary speed, data capacity and security, as well as timely development of complementary products, such as high-speed modems, for providing reliable Internet access and services. The Internet has experienced, and is likely to continue to experience, significant growth in the number of users and the amount of traffic. If the Internet continues to experience increased usage, the Internet infrastructure may be unable to support the demands placed on it. In addition, the performance of the Internet may be harmed by increased usage.

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

     Demand for our services could be adversely affected if our prospective customers are unable to implement the transaction and security standards required under HIPAA.

     For some of our network services, we routinely implement electronic data interfaces, (“EDIs”), to our customers’ locations that enable the exchange of information on a computerized basis. To the extent that our customers do not have sufficient personnel to implement the transactions and security standards required by HIPAA or to work with our information technology personnel in the implementation of our electronic interfaces, the demand for our network services could decline.

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

     Certain aspects of the Company’s business are dependent upon its ability to store, retrieve, process, and manage data and to maintain and upgrade its data processing capabilities. Interruption of data processing capabilities for any extended length of time, loss of stored data, programming errors or other system failures could cause customers to cancel their service and could have a material adverse effect on the Company’s business and results of operations. The Company is currently in the process of installing new company-wide management information software and there can be no assurance that the installation of this new system will proceed according to plan.

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

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

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

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

     A breach of security may cause the Company’s customers to curtail or stop using the Company’s services.

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

     Changes in the accounting treatment of stock options could adversely affect the Company’s results of operations.

     The Financial Accounting Standards Board has recently announced its decision to require companies to expense employee stock options in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 123, Accounting for Stock-Based Compensation, for financial reporting purposes, effective during the quarter ending September 30, 2005. Such stock option expensing will require the Company to value its employee stock option grants pursuant to a binomial valuation formula, and then amortize that value against the Company’s reported earnings over the vesting period in effect for those options. The Company currently accounts for stock-based awards to employees in accordance with Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, and has adopted the disclosure-only alternative of SFAS 123. When the Company is required to expense employee stock options in the future, this change in accounting treatment will adversely affect the Company’s reported results of operations as the stock-based compensation expense will be charged directly against the Company’s reported earnings. For an illustration of the effect of such a change on the Company’s recent results of operations, see Note A of Notes to Consolidated Financial Statements in the Company’s Form 10-Q for the fiscal year ended March 31, 2004. Participation by the Company’s employees in the Company’s Employee stock Purchase Plan could trigger additional compensation charges.

     Failure to achieve and maintain effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act could have a material adverse effect on the Company’s business, operating results and stock price.

     The Company is in the process of evaluating and testing its internal control processes in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act, which, beginning with the Company’s Annual Report on Form 10-K for the fiscal year ending March 31, 2005, requires annual management assessments and a written report on the effectiveness of the Company’s internal control over financial reporting and a report by the Company’s independent auditors addressing the assessments in management’s report as of the end of each fiscal year. As a result of the evaluation and testing required by Section 404 of the Sarbanes-Oxley Act, the Company is incurring additional expenses and a diversion of management’s time. During the course of this evaluation and testing, the Company or its independent auditors may identify significant deficiencies or material weaknesses which the Company may not be able to remediate in time to meet the deadline imposed by the Sarbanes-Oxley Act for compliance with the requirements of Section 404. The quarterly report on Form 10-Q of which this risk factor forms a part contains disclosure regarding certain internal control deficiencies. Management’s efforts to remediate these or any other deficiencies may be incomplete by the deadlines imposed by the Sarbanes-Oxley Act, or otherwise unsuccessful. If any significant deficiencies or material weaknesses are identified during the quarter ending March 31, 2005, the Company will likely be unable to remediate such deficiencies or weaknesses by the end of such fiscal year. If the Company fails to achieve or maintain the adequacy of its internal controls, as such standards may be modified, supplemented or amended from time to time, management will not be able to conclude that the Company has effective internal controls over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act. Even if management concludes that the Company has effective internal controls over financial reporting, there can be no assurance that the Company’s independent auditors will not issue an adverse opinion, or a disclaimer of opinion, with respect to the Company’s internal control over financial reporting. If the Company fails to timely achieve and maintain an effective internal control environment, it may be subject to sanctions or investigation by regulatory authorities, such as the Securities and Exchange Commission, its business and operating results could be harmed, investors could lose confidence in the accuracy and completeness of its reported financial information, and the trading price of its common stock could drop significantly.

Item 3. Quantitative and Qualitative Disclosures About Market Risk –

     The Company’s cash and cash equivalents is invested primarily in short-term, highly liquid investments with maturities of 90 days or less, which are subject to credit and interest rate risk. The Company does not employ any derivative financial instruments, other financial instruments, or derivative commodity instruments to hedge any market risk. The Company had no debt outstanding as of December 31, 2004, and therefore, had no market risk related to debt.

Item 4. Controls and Procedures –

Evaluation of Disclosure Controls and Procedures

     CorVel’s management, with the participation of CorVel’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of CorVel’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based upon that evaluation, CorVel’s Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, except as described below, CorVel’s disclosure controls and procedures were effective in timely alerting them to the material information relating to CorVel (or its consolidated subsidiaries) required to be included in the reports CorVel files or submits under the Securities Exchange Act of 1934.

Changes in Internal Control Over Financial Reporting

     In November 2004, the Company’s independent auditors advised the Company’s board of directors and audit committee that the following identified internal control deficiencies constitute a significant deficiency in the Company’s internal controls: The Company has internal control deficiencies resulting from the lack of segregation of duties in the financial reporting process and an over-reliance on the Chief Financial Officer for the performance of key period-end accounting and financial reporting functions. For example, the Chief Financial Officer is responsible for preparing the period-end consolidation schedule and all top side adjustments as it relates to Company-wide accruals, accounting estimates, and taxes, with little or no detailed review or oversight by another individual who is independent of the preparation of this financial information.

     A significant deficiency is defined under the Public Company Accounting Oversight Board’s Auditing Standard No. 2 as a control deficiency, or combination of control deficiencies, that adversely affects a company’s ability to initiate, authorize, record, process or report external financial data reliably in accordance with generally accepted accounting principles such that there is more than a remote likelihood that a misstatement of a company’s financial statements that is more than inconsequential will not be prevented or detected.

     During the quarter ended December 31, 2004, management has taken steps to remediate these deficiencies as part of the Company’s Sarbanes-Oxley Act Section 404 implementation. The remediation effort included moving certain financial reporting functions such as preparation of the consolidation entries, top side adjustments, accruals, accounting estimates, and income taxes to the Corporate Controller and other qualified finance and accounting personnel. The Chief Financial Officer is reviewing and providing oversight over these functions. The Company has not, however, made efforts to supplement existing accounting and finance resources in order to address the lack of segregation of duties in the financial reporting process and other similar concerns. Accordingly, there can be no assurance that the remediation efforts will be successful or complete, or that additional testing of the Company’s internal controls will not identify additional deficiencies that, either individually or when aggregated with the existing deficiencies, would result in a material weakness. A material weakness is defined under the Public Company Accounting Oversight Board’s Auditing Standard No. 2 as a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the financial statements will not be prevented or detected. There also can be no assurance that the Company’s independent auditors will not issue an adverse opinion, or a disclaimer of opinion, with respect to the Company’s internal control over financial reporting for the fiscal year ending March 31, 2005.

     As the Company continues the process of evaluating its internal control structure, additional significant deficiencies or material weaknesses may be identified which will require remediation.

     Other than as discussed in the preceding paragraphs, during the most recent fiscal quarter covered by this report, there have been no changes in CorVel’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) that has materially affected, or is reasonably likely to materially affect, CorVel’s internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings –

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

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds –

     The following table summarizes any purchases of the Company common stock made by or on behalf of the Company for the quarter ended December 31, 2004.

Item 3. Defaults Upon Senior Securities – None.

Date: February 9 2005

Item 4. Submission of Matters to a Vote of Security Holders – None

Item 5. Other Information – None.

Item 6. Exhibits –

(a)	Exhibits and reports on Form 8-K

31.1         Certification of the Chief Executive Officer Pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2         Certification of the Chief Financial Officer Pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

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

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

SIGNATURES

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

Date: February 9 2005