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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended: September 30, 2004

OR

For the transition period from              to             

Commission file number: 0-21428

OCCUPATIONAL HEALTH + REHABILITATION INC

(Exact name of registrant as specified in its charter)

(781) 741-5175

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    ¨  YES    x  NO

The number of shares outstanding of the registrant’s Common Stock as of November 12, 2004 was 3,088,111.

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OCCUPATIONAL HEALTH + REHABILITATION INC

Quarterly Report on Form 10-Q

For the Quarter Ended September 30, 2004

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PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

OCCUPATIONAL HEALTH + REHABILITATION INC

Consolidated Balance Sheets

(dollar amounts in thousands)

The accompanying notes are an integral part of these consolidated financial statements

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OCCUPATIONAL HEALTH + REHABILITATION INC

Consolidated Statements of Operations

(amounts in thousands, except per share data)

(Unaudited)

The accompanying notes are an integral part of these consolidated financial statements.

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OCCUPATIONAL HEALTH + REHABILITATION INC

Consolidated Statements of Operations

(amounts in thousands, except per share data)

(Unaudited)

The accompanying notes are an integral part of these consolidated financial statements.

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OCCUPATIONAL HEALTH + REHABILITATION INC

Consolidated Statements of Cash Flows

(dollar amounts in thousands)

(Unaudited)

The accompanying notes are an integral part of these consolidated financial statements.

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OCCUPATIONAL HEALTH + REHABILITATION INC

Notes to Consolidated Financial Statements

(Unaudited, dollar amounts in thousands)

1. Basis of Presentation

The accompanying unaudited interim financial statements of Occupational Health + Rehabilitation Inc (the “Company”) have been prepared in accordance with the instructions to Form 10-Q and Rule 10.01 of Regulation S-X pertaining to interim financial information and disclosures required by generally accepted accounting principles in the United States of America. The interim financial statements presented herein reflect all adjustments (consisting of normal recurring adjustments) which, in the opinion of management, are considered necessary for a fair presentation of the Company’s financial condition as of September 30, 2004 and results of operations for the three months and nine months ended September 30, 2004 and 2003. The results of operations for the three months and nine months ended September 30, 2004 are not necessarily indicative of the results that may be expected for the full year or for any future period.

2. Reclassification

Certain prior year amounts have been reclassified to conform to the 2004 presentation. These changes included the reclassification of depreciation expense to center operating expenses and general and administrative expenses, as applicable.

3. Significant Accounting Policies

In December 2002, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure – an amendment of SFAS No. 123, Accounting for Stock Based Compensation. SFAS 148 provides additional transition guidance for those entities that elect to voluntarily adopt the accounting provisions of SFAS 123. SFAS 148 does not change the provisions of SFAS 123 that permit entities to continue to apply the intrinsic value method of Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees.

The Company accounts for its Stock Option Program under the recognition and measurement principles of APB 25. Consequently, no compensation cost related to the stock option program is reflected in net income since all options under this program 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 earnings per share if the Company had applied the fair value recognition provisions of SFAS 123 to the Stock Option Program.

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Notes to Consolidated Financial Statements (continued)

4. Credit Arrangements

Lines of Credit

On December 15, 2000, the Company entered into an agreement with DVI Business Credit Corporation (“DVI”) for a three-year revolving credit line of up to $7,250 (the “Credit Line”). In March 2003, DVI extended the term of the Credit Line to March 31, 2004. The facility was collateralized by present and future assets of certain operations of the Company. The borrowing base consisted of a certain percentage of eligible accounts receivable (as defined in the agreement). Under the terms of the agreement, the Company paid a commitment fee of 0.50% of the unused portion of the Credit Line and certain other fees. The interest rate under the Credit Line was the prime rate plus 1.00%.

Effective March 18, 2003, the financial covenants under the Credit Line included a quarterly tangible net worth requirement of $2,500 (defined as shareholders’ equity plus subordinated debt, and minority interests less intangible assets, goodwill, deferred tax assets, leasehold improvements, deposits and certain prepayments), a leverage coverage ratio not greater than 5.00 to 1.00, and a fixed charge ratio not less than 1.25 to 1.00 as well as certain restrictions relating to the acquisition of new businesses without the prior approval of DVI. The Company was not in compliance with certain of its covenants during the three months ended March 31 and June 30, 2003 and was granted waivers by DVI in both instances.

On August 21, 2003, shortly before DVI filed for Chapter 11 bankruptcy protection, DVI sold the Company’s loan to a subsidiary of CapitalSource Inc. (“CapitalSource”), a publicly traded asset-based lender. As of September 30, 2003, the Company did not meet any of its three financial covenants and was granted a waiver by CapitalSource.

On December 15, 2003, the Company entered into an agreement with CapitalSource for a new three-year revolving line of credit (the “CapitalSource Credit Line”) of up to $7,250. The CapitalSource Credit Line is collateralized by present and future assets of certain operations of the Company. The borrowing base consists of a certain percentage of eligible accounts receivable (as defined in the agreement). Under the terms of the agreement, the Company pays a commitment fee of 0.60% of the unused portion of the CapitalSource Credit Line and certain other fees. The interest rate under the CapitalSource Credit Line is the prime rate plus 1.00%, subject to a floor of 4.00% on the prime rate. At September 30, 2004, the interest rate under the CapitalSource Credit Line was 5.75%.

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Notes to Consolidated Financial Statements (continued)

The financial covenants under the CapitalSource Credit Line consist of a fixed charge ratio (defined as the ratio, for a defined period, of earnings before interest, taxes, depreciation, amortization, and other non-cash charges and non-recurring gains and losses to the sum of payments on long-term debt, exclusive of certain subordinated promissory notes, and capital leases, accrued interest and dividends, and capital expenditures and income taxes paid in cash) of not less than 1.20 to 1.00, tested monthly on a trailing six months’ basis, commencing January 2004, and minimum liquidity (defined as the sum of unrestricted cash on hand, the Company’s pro rata share of cash on hand in its joint ventures, and the unborrowed availability under the CapitalSource Credit Line) of $1,000. In 2003, the fixed charge ratio was set at not less than 1.00 to 1.00 on a trailing four months’ basis through November 30, 2003 and a trailing five months’ basis through December 31, 2003. During the term of the agreement, the Company may enter into new capital lease obligations of up to $1,000 and must obtain the prior approval of CapitalSource before acquiring any new business. The Company was in compliance with its financial covenants through September 30, 2004. As of and for the trailing six months ended September 30, 2004, the Company’s fixed charge ratio was 2.00 to 1.00 and its minimum liquidity was $3,705.

Based on its projections, the Company expects to be in compliance through 2005 with its financial covenants under the CapitalSource Credit Line. However, there can be no assurance that the Company will meet its projections and if it does not, it may not be in compliance with its financial covenants in the future. See “Subordinated Promissory Notes” below for discussion of events of default and associated waivers in connection with the CapitalSource Credit Line.

At September 30, 2004, the maximum amount available under the CapitalSource Credit Line borrowing base formula was $7,250, of which $6,125 was outstanding.

Subordinated Promissory Notes

Under the terms of its subordinated promissory notes (the “Notes”), the Company was required to make principal debt payments of $900 on each of March 24, June 24, and September 24, 2004, together with accrued interest thereon. If the Company does not fulfill its contractual payment obligations, the annual interest rate on the unpaid principal and interest increases to 15.00% from 8.00% until such default is cured. A default under the Notes permits the Note holders to accelerate payment of all unpaid principal and interest. However, under the CapitalSource Credit Line, no amounts can be paid to the Note holders if CapitalSource objects.

On March 24, 2004, the Company paid $450 of the $900 principal amount due, together with accrued interest thereon of $36. The Company elected to enter into the resultant default in order to conserve its cash resources for operating purposes. The default under the Notes created a cross default under the CapitalSource Credit Line. Accordingly, the Company obtained a waiver from CapitalSource on March 30, 2004 which waives any similar cross default that occurs as a result of any additional partial payment of the Notes by the Company through March 31, 2005. Also on March 30, 2004, the Note holders agreed in writing not to pursue any remedies related to the failure to make a full installment payment on the Notes through March 31, 2005.

On each of May 5, 2004 and June 18, 2004, the Company paid an additional $225 of principal, being the balance of the amount due on its Notes as of March 24, 2004, together with accrued interest thereon of $22 and $27, respectively. After the payment on June 18, 2004, the Company was no longer in default on the Notes. However, the Company elected not to pay $900 due on the Notes on June 24, 2004 and so reverted to default at which time the Company was obligated to accrue interest at 15.00% on the sum of the outstanding principal and the accrued interest to date.

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Notes to Consolidated Financial Statements (continued)

On July 23, 2004, the Company paid $243 on the Notes, being the total interest accrued thereon as of that date. On each of August 27, September 30 and October 29, 2004, the Company paid an additional $225 of principal together with accrued interest thereon of $26, $22 and $16, respectively. The Company anticipates making additional payments on the Notes in future months. Due to an increase in days sales outstanding in accounts receivable and a consequent reduction in liquidity, the Company now expects to generate sufficient funds to repay the remaining principal amount of $1,125 by March 31, 2005 whereas previously it had anticipated repaying the amount due by December 31, 2004. Nevertheless, if cash is required for operations, the Company will continue to defer payments on the Notes and may be required to request an extension of the current waivers from both the Note holders and CapitalSource. There can be no assurance, however, that such extensions of the current waivers will be granted.

The total amount outstanding on the Notes as of November 12, 2004 was $1,131, of which $6 represented accrued interest.

Liquidity

The Company expects that its principal use of funds in the foreseeable future will be for the repayment of the Notes and other debt obligations, and for working capital requirements, purchases of property and equipment, and acquisitions and the formation of joint ventures. The Company believes that the funds available under the CapitalSource Credit Line and a lease line with GE Healthcare Financial Services, Inc., together with cash generated from operations, and other sources of funds it anticipates will be available to it, will be adequate to meet these projected needs.

5. Earnings (Loss) Per Share

The Company calculates earnings (loss) per share in accordance with SFAS No. 128, Earnings per Share, which requires disclosure of basic and diluted earnings (loss) per share. Basic earnings (loss) per share excludes any dilutive effects of options, warrants and convertible securities while diluted earnings (loss) per share includes such amounts.

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Notes to Consolidated Financial Statements (continued)

The following table sets forth the computation of basic and diluted earnings (loss) per share (amounts in thousands, except per share data):

6. Restructuring Charge

During the fourth quarter of 1999, the Company began to implement a restructuring plan to close certain centers that were either outside of the Company’s core occupational health focus or were deemed not capable of achieving significant profitability due to specific market factors. As a result of the restructuring plan and other actions, the Company recorded restructuring and other charges of $2,262 during the fourth quarter of 1999. The restructuring plan also included the streamlining of certain other remaining operations and the elimination or combining of various other personnel positions within the Company. The Company also negotiated buyout terms for some or all of the space at certain of the closed centers and made final payment under these arrangements in October 2003. The Company has no further obligations under its restructuring plan.

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

Overview

The Company is a leading provider of occupational healthcare services to employers and their employees and specializes in the prevention, treatment and management of work-related injuries and illnesses as well as regulatory compliance services. The Company develops and operates occupational health centers and contracts with other healthcare providers to develop integrated occupational healthcare delivery systems. The Company typically operates the centers under management and submanagement agreements with professional corporations that practice exclusively through such centers. Additionally, the Company has entered into joint ventures and management agreements with health systems to provide management and related services to the centers and networks of providers established by the joint ventures or health systems.

The Company’s operations have been funded primarily through venture capital investments, a merger with Telor Opthalmic Pharmaceuticals, Inc. in 1996, and lines of credit. The Company’s growth has resulted predominantly from the formation of joint ventures, long-term management agreements, acquisitions, and development of businesses principally engaged in occupational healthcare.

The Company derives its revenue from three principal sources: treatment of work-related injuries, including the provision of rehabilitation services necessary to speed the patient’s post-injury recovery, injury prevention and regulatory compliance services such as pre-placement physical examinations and drug and alcohol tests, and workplace health services where the Company provides on-site delivery of its services for work-related injuries, generally to regional locations of major corporations. Medical treatment of injuries and the associated rehabilitation services account for nearly two-thirds of the Company’s revenue, prevention and regulatory compliance services about 25%, and workplace health about 10%. The Company operates 35 centers, 26 of which are in the northeast of the United States, five in Tennessee, and four in Missouri. The Company manages workplace health contracts not only at sites close to its centers but also in many other areas of the country.

The level of economic activity in the regions of the country in which the Company’s centers are located impacts its profitability. Certain classifications of employment have higher injury rates than others. For instance, manufacturing, transportation, healthcare delivery, and construction tend to have high injury rates and therefore high utilization of the types of services offered by the Company. Consequently, changes in the employment levels in these market sectors impact the volume of business available to the Company. The Company also provides more services when employment levels rise. The stronger the employment market, the greater the demand for pre-placement examinations and drug and alcohol tests. Higher levels of economic activity also result in more work-related injuries requiring treatment. In the past three years, when employment levels have been soft and economic growth modest, the Company has focused on increasing its market share in a still very fragmented industry through aggressive marketing, offering high levels of service to its clients, and maintaining a tight control on its costs.

In many states in which the Company operates, the prices it charges for its injury treatment of work-related injuries are determined by state specific fee schedules established by state agencies pursuant to the workers’ compensation programs in that state. Such fee schedules are reviewed by the regulatory agencies from time to time, but changes in the rates tend to lag the increase in the cost of delivering medical services. Moreover, reimbursement rates vary widely from state to state. In those states not governed by a fee schedule, the Company charges the usual and customary rates which are based on the average fees paid by workers’ compensation insurers and accepted by healthcare providers. The Company uses the services of third party consultants to assist it in keeping abreast of the frequently complex and often changing workers’ compensation fee schedules and the appropriate usual and customary fees.

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Overview (continued)

Accounts receivable is the Company’s largest single asset. The Company closely monitors its days sales outstanding, a measure computed by dividing its average revenue per day into its current accounts receivable balance. By reducing its days sales outstanding, the Company can increase its cash inflow and use the additional funds to pay down its short-term debt or for general corporate purposes.

The Company’s major focus is building its revenue base. Once a center has covered its fixed costs, which account on average for approximately 50% of its revenue and consist primarily of employee-related expenses and rent and occupancy charges, each additional dollar of revenue generates a high profit margin. A new injury visit, for example, generates about $600 in net revenue through follow up visits and referrals to rehabilitation treatment.

The discussion and analysis of the financial condition and results of operations of the Company are based on the Company’s consolidated financial statements, included elsewhere within this report, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the use of estimates and judgments that affect the reported amounts and related disclosures of commitments and contingencies. The Company relies on historical experience and on various other assumptions that it believes to be reasonable under the circumstances to make judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates.

Critical Accounting Policies

Revenue Recognition

Revenue is recorded at estimated net amounts to be received from employers, third-party payers, and others for services rendered. The Company operates in certain states that regulate the amounts which the Company can charge for its services associated with work-related injuries and illnesses.

Provision for Doubtful Accounts

Accounts receivable consist primarily of amounts due from third-party payers (principally, managed care companies and commercial insurance companies), employers, and others, including private-pay patients. Estimated provisions for doubtful accounts are recorded to the extent that it is probable that a portion or all of a particular account receivable will not be collected. The Company estimates the provision for doubtful accounts based on various factors including payer type, historical collection patterns, and the age of the receivable. Changes in estimates for specific accounts receivable are recorded in the period in which the change occurs.

Impairment of Goodwill and Other Intangible Assets

The carrying value of goodwill is reviewed annually. If this review indicates that goodwill will not be recoverable, as determined based on the projected discounted cash flows of the entity acquired, the Company’s carrying value of the goodwill will be reduced by the estimated shortfall of cash flows. No such impairment existed at December 31, 2003 or September 30, 2004. Other intangible assets include non-compete agreements and deferred financing costs which are being amortized using the straight-line method over periods of three to five years.

Reserves for Employee Health Benefits

The Company retains a significant amount of self-insurance risk for its employee health benefits. The Company maintains stop-loss insurance which limits the Company’s liability for health insurance payments on both an individual and total group basis. At the end of each quarter, the Company records an accrued expense for

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Critical Accounting Policies (continued)

estimated health benefit claims incurred but not reported at the end of such period. The Company estimates this accrual based on various factors including historical experience, industry trends, and recent claims history. This accrual is by necessity based on estimates and is subject to ongoing revision as conditions change and as new data present themselves. Adjustments to estimated liabilities are recorded in the accounting period in which the change in estimate occurs.

Professional Liability Coverage

The Company maintains entity professional liability insurance coverage on a claims-made basis in all states in which it has operating centers. The Company also maintains shared professional liability insurance coverage in the name of its employed physicians on a claims-made basis. At December 31, 2003, the Company recorded an actuarially determined liability equal to the estimated required reserves for future payments for claims that have been reported and claims that have occurred but have not been reported. At September 30, 2004, the Company reviewed this liability and determined that the amount remained appropriate as of that date. The Company intends to renew its existing professional liability insurance policies and is not aware of any reason it will not be able to do so. Nor is it aware of any claims that may result in a loss in excess of amounts covered by its existing insurance policies.

The following table sets forth, for the periods indicated, the relative percentages which certain items in the Company’s consolidated statements of operations bear to revenue. The following information should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this report. Historical results and percentage relationships are not necessarily indicative of the results that may be expected for any future period.

RESULTS OF OPERATIONS (dollar amounts in thousands)

Three Months Ended September 30, 2004 and 2003

Revenue

Revenue increased by $1,531, or 11.4%, to $14,961 for the three months ended September 30, 2004 from $13,430 for the three months ended September 30, 2003. Revenue at centers open for comparable periods in both years increased by $1,442, or 10.7%, primarily due to growth in revenue per visit as a result of price increases. A new center start-up in late 2003 generated $89 in additional revenue during the current quarter. Compared to the same period in the prior year, same center new injury initial visits were flat and prevention and regulatory compliance services revenue increased only 0.9%, reflecting the slowing of the national economic recovery in the third quarter of 2004.

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RESULTS OF OPERATIONS (dollar amounts in thousands) (continued)

Workplace health and rehabilitation services revenue, which relates to the provision of work-related healthcare services at employer sites, increased 42.7%, primarily due to new contracts.

Center Operating Expenses

Center operating expenses increased $453, or 3.8%, to $12,522 for the three months ended September 30, 2004 from $12,069 for the three months ended September 30, 2003. The principal reasons for the increase in expenses were the additional costs associated with the revenue gains during the quarter and charges in connection with the Company’s bonus program which is tied to profitability. As a percentage of revenue, center operating expenses decreased to 83.7% for the three months ended September 30, 2004 from 89.9% for the three months ended September 30, 2003, reflecting the Company’s leveraging of its fixed costs on its revenue growth.

General and Administrative Expenses

General and administrative expenses increased $129, or 9.8%, to $1,439 for the three months ended September 30, 2004 from $1,310 for the three months ended September 30, 2003, primarily due to an increase in amounts accrued for management bonuses. As a percentage of revenue, general and administrative expenses decreased to 9.6% for the three months ended September 30, 2004 from 9.8% for the three months ended September 30, 2003.

Interest Expense, net

Interest expense increased by $39 to $214 for the three months ended September 30, 2004 from $175 for the three months ended September 30, 2003. Of the total increase, $34 was attributable to a combination of an increase in borrowings under, and the rate of interest on, the Company’s line of credit. The Company has drawn down on its credit line primarily in order to make installment payments on its long-term debt and is charged interest on its borrowings at the prime rate plus 1.00%. The balance of the increase in interest expense is attributable primarily to an increase in the interest rate on the Company’s Notes to 15.00% from 8.00% because the Company did not pay the full amount of the principal when due. The Company expects to make principal payments in arrears for the remainder of 2004, and will therefore be obligated to continue to accrue interest at 15.00% per year on the outstanding past due balance. Interest income was $2 in both the three months ended September 30, 2004 and the three months ended September 30, 2003. As a percentage of revenue, interest expense, net increased to 1.4% for the three months ended September 30, 2004 from 1.3% for the three months ended September 30, 2003.

Minority Interest and Contractual Settlements

Minority interest represents the share of (profits) and losses of joint venture investors with the Company. For the three months ended September 30, 2004, the minority interest in pre-tax profits of the joint ventures was $202 compared to $187 for the three months ended September 30, 2003. Contractual settlements represent payments to, or receipts from, the Company’s partners under the Company’s management contracts in respect of the partners’ share of operating (profits) or losses, respectively. There were no contractual settlements during the three months ended September 30, 2004 or the three months ended September 30, 2003 since the Company terminated its management contracts with its former partners in Connecticut and Tennessee during the first six months of 2003.

Tax Provision (Benefit)

The tax provision (benefit) was $233 and $(87) and the effective tax rates were 42.2% and (26.4%) for the three months ended September 30, 2004 and 2003, respectively. The Company computes its effective tax rate

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RESULTS OF OPERATIONS (dollar amounts in thousands) (continued)

based on its projected level of profitability, adjusted for certain expenses which are not deductible, and applying its blended federal and state income tax rates. Based on its financial results for the nine months ended September 30, 2004, the Company is projecting a greater profit for 2004 than it did in the prior year for 2003. As a result, the upward impact of the permanent tax differences on the effective tax rate in 2004 is not as significant as it was in 2003.

Nine Months Ended September 30, 2004 and 2003

Revenue

Revenue increased by $3,409, or 8.5%, to $43,461 for the nine months ended September 30, 2004 from $40,052 for the nine months ended September 30, 2003. Revenue at centers open for comparable periods in both years increased by $4,073, or 10.4%, primarily due to growth in revenue per visit as a result of price increases. A new center start-up in late 2003 generated $249 in additional revenue. Compared to the same period in the prior year, prevention and regulatory compliance services revenue increased 6.1% and workplace health and rehabilitation services revenue, which relates to the provision of work-related healthcare services at employer sites, increased 30.0%, primarily due to new contracts. Same center new injury initial visits were flat year over year.

During the first quarter of 2003, management implemented measures to close or eliminate certain unprofitable centers and lines of business which generated $913 of revenue during the three months ended March 31, 2003. Of the total revenue eliminated, $782 was attributable to the reorganization of the Company’s operations in Tennessee, including the closure of a center and the cessation of urgent care services, and $131 to the termination of management contracts in Connecticut.

Center Operating Expenses

Center operating expenses increased $1,208, or 3.4%, to $36,958 for the nine months ended September 30, 2004 from $35,750 for the nine months ended September 30, 2003. The principal expense increases were for the additional costs associated with the revenue gains during the year, consulting fees tied to revenue growth resulting from implementation of recommended improvements to the Company’s billing practices, charges in connection with the Company’s employee bonus program and other employee-related expenses, and costs incurred for the ongoing rollout of the Company’s upgrade to its practice management system. These increases were partially offset by the elimination of costs associated with centers no longer under management, primarily in Connecticut. As a percentage of revenue, center operating expenses decreased to 85.1% for the nine months ended September 30, 2004 from 89.3% for the nine months ended September 30, 2003, reflecting the Company’s leveraging of its fixed costs on its revenue growth.

General and Administrative Expenses

General and administrative expenses increased $278, or 7.6%, to $3,924 for the nine months ended September 30, 2004 from $3,646 for the nine months ended September 30, 2003, primarily due to increases in regional management expenses and amounts accrued for management bonuses. As a percentage of revenue, general and administrative expenses decreased to 9.0% for the nine months ended September 30, 2004 from 9.1% for the nine months ended September 30, 2003.

Interest Expense, net

Interest expense increased by $172, to $630 in the nine months ended September 30, 2004 from $458 in the nine months ended September 30, 2003. Of the total increase, $117 was attributable to a combination of an

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RESULTS OF OPERATIONS (dollar amounts in thousands) (continued)

increase in borrowings under, and the rate of interest on, the Company’s line of credit. The Company has drawn down on its credit line primarily in order to make installment payments on its long-term debt and is charged interest on its borrowings at prime rate plus 1.00%. The balance of the increase in interest expense was attributable primarily to an increase in the interest rate on the Company’s Notes to 15.00% from 8.00% because the Company did not pay the full amount of the principal when due. The Company expects to make principal payments in arrears for the remainder of 2004 and therefore it will be obligated to continue to accrue interest at 15.00% per year on the outstanding past due balance. Interest income was $4 and $7 for the nine months ended September 30, 2004 and 2003, respectively. As a percentage of revenue, interest expense, net increased to 1.5% for the nine months ended September 30, 2004 from 1.1% for the nine months ended September 30, 2003.

Minority Interest and Contractual Settlements

Minority interest represents the share of (profits) and losses of joint venture investors with the Company. For the nine months ended September 30, 2004, the minority interest in pre-tax profits of the joint ventures was $617 compared to $602 for the nine months ended September 30, 2003. Contractual settlements represent payments to, or receipts from, the Company’s partners under the Company’s management contracts in respect of the partner’s share of operating (profits) or losses, respectively. There were no contractual settlements during the nine months ended September 30, 2004, since the Company terminated its management contracts with its former partners in Connecticut and Tennessee during the first six months of 2003. For the nine months ended September 30, 2003, the Company recorded a contractual settlement of $38 for funded operating losses.

Tax Provision (Benefit)

The tax provision (benefit) was $534 and $(133) and the effective tax rates were 41.9% and (32.6%) for the nine months ended September 30, 2004 and 2003, respectively. The Company computes its effective tax rate based on its projected level of profitability, adjusted for certain expenses which are not deductible, and applying its blended federal and state income tax rates. Based on its financial results for the nine months ended September 30, 2004, the Company is projecting a greater profit for 2004 than it did in the prior year for 2003. As a result, the upward impact of the permanent tax differences on the effective tax rate in 2004 is not as significant as it was in 2003.

Significant Contractual Obligations

The following summarizes the Company’s contractual obligations at September 30, 2004, and the effect such obligations are expected to have on its liquidity and cash flows in future periods.

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Liquidity and Capital Resources (dollar amounts in thousands)

At September 30, 2004, the Company had negative working capital of $2,155 compared to negative working capital of $3,132 at December 31, 2003. The Company’s principal sources of liquidity as of September 30, 2004 consisted of (i) cash and cash equivalents aggregating $3,023, (ii) uncollateralized accounts receivable of $2,100, and (iii) $1,375 available under certain lines of credit as described below.

Net cash provided by operating activities during the nine months ended September 30, 2004 was $3,217 compared to $3,449 for the nine months ended September 30, 2003. The reduction in liquidity was primarily due to a negative net change in operating assets and liabilities, partially offset by an improvement in profitability.

Accounts receivable increased $2,598 in the nine months ended September 30, 2004 compared to $173 in the comparable period in the prior year. Of the increase in 2004, $1,560 was due to an increase of ten days in days sales outstanding and the balance was the result of growth in revenue. Days sales outstanding in accounts receivable, net of allowances, were 70 at September 30, 2004 compared to 63 at September 30, 2003 and 60 at December 31, 2003. The increase in days sales outstanding primarily reflected the temporary effect of transitioning certain centers to the Company’s practice management system upgrade. The Company anticipates that the days sales outstanding will trend downwards during the fourth quarter of 2004. Accounts payable and accrued expenses increased $1,997 in the nine months ended September 30, 2004 compared to $1,496 in the comparable period in the prior year. The increase of $501 between the two periods is primarily due to an increase in the accrual for bonuses under the Company’s employee incentive programs

Net cash used in investing activities for the nine months ended September 30, 2004 was $233 compared to $1,109 for the nine months ended September 30, 2003. The Company’s investing activities included fixed asset additions of $233 and $626 for the nine months ended September 30, 2004 and 2003, respectively. Fixed asset additions in both years primarily related to information systems equipment.

Net cash used in investing activities for the nine months ended September 30, 2003 also included $310 relating to the purchase of five centers in Tennessee previously managed by the Company under a long-term management contract, $150 relating to the purchase of an occupational health practice in Murfreesboro, Tennessee which was merged into an existing Company center, and $23 relating to the purchase of four centers in Connecticut.

Net cash used by financing activities was $1,706 and $1,960 for the nine months ended September 30, 2004 and 2003, respectively. For the nine months ended September 30, 2004, the Company received net advances of $1,168 under its CapitalSource Credit Line, primarily to fund long-term debt payments. For the nine months ended September 30, 2003, the Company received net advances under its CapitalSource Credit Line of $1,972, primarily to fund the repurchase of the Company’s convertible preferred stock. The Company used funds of $2,294 and $591 in the nine months ended September 30, 2004 and 2003, respectively, to pay long-term debt and capital lease obligations. In the nine months ended September 30, 2004 and 2003, the Company also paid cash of $650 and $609, respectively, relating to distributions to its joint venture partners. Distributions of cash in joint ventures to the Company and its joint venture partners allow the Company access to its share of cash accumulated by the joint ventures which it can then use for general corporate purposes. The Company expects to continue to make distributions when the cash balances in the joint ventures permit.

Under lease arrangements with certain leasing companies, the Company accumulates its fixed asset purchases until the value of those purchases reaches a certain minimum amount before requesting a draw down from its lease lines. In the nine months ended September 30, 2004 and 2003, the Company received cash proceeds of $84 and $73, respectively, under its lease lines, primarily to fund the previous purchase of information systems equipment.

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Liquidity and Capital Resources (dollar amounts in thousands) (continued)

Subordinated Promissory Notes

In the nine months ended September 30, 2003, net cash used by financing activities included $2,805 in connection with the Company’s repurchase in March 2003 of all of its outstanding Series A Convertible Preferred Stock, namely 1,416,667 shares, for (i) $2,700 in cash at closing, (ii) subordinated promissory notes (the “Notes”) in the aggregate principal amount of $2,700, and (iii) 1,608,247 shares of the Company’s common stock. The Company incurred $105 of legal expenses in connection with this transaction. The Notes bear interest at 8.00% per year and are payable in three equal principal installments, together with interest accrued thereon, 12, 15, and 18 months after the date of issuance. In the event a principal payment is not made when due, the interest rate on the unpaid principal and interest increases to 15.00% per year until the default is cured. A default under the Notes permits the Note holders to accelerate payment of all unpaid principal and interest. However, under the CapitalSource Credit Line, no amounts can be paid to the Note holders if CapitalSource objects.

On March 24, 2004, the Company paid $450 of the $900 principal amount then due on its Notes, together with accrued interest thereon of $36. The Company elected to enter into such default in order to conserve its cash resources for operating purposes. The default under the Notes created a cross default under the CapitalSource Credit Line. Accordingly, the Company obtained a waiver from CapitalSource on March 30, 2004 which waives any similar cross default that occurs as a result of any additional partial payment of the Notes by the Company through March 31, 2005. Also on March 30, 2004, the Note holders agreed in writing not to pursue any remedies related to the failure to make a full installment payment on the Notes through March 31, 2005.

On each of May 5, 2004 and June 18, 2004, the Company paid an additional $225 of principal, being the balance of the amount due on its Notes as of March 24, 2004, together with accrued interest thereon of $22 and $27, respectively. After the payment on June 18, 2004, the Company was no longer in default on the Notes. However, the Company elected not to pay $900 due on the Notes on June 24, 2004 and so reverted to default, at which time the Company began to accrue interest at 15.00% on the sum of the outstanding principal and the accrued interest to date.

On July 23, 2004, the Company paid $243 on the Notes, being the total interest accrued thereon as of that date. On each of August 27, September 30 and October 29, 2004, the Company paid an additional $225 of principal together with accrued interest thereon of $26, $22 and $16, respectively.

The Company anticipates making additional payments on the Notes in future months. Due to a deterioration of days sales outstanding in accounts receivable and a consequent reduction in liquidity, the Company now expects to generate sufficient funds to repay the remaining principal amount of $1,125 by March 31, 2005 whereas previously it had anticipated repaying the amount due by December 31, 2004. Nevertheless, if cash is needed for operations the Company will continue to defer payments on the Notes and may be required to request an extension of the current waivers from both the Note holders and CapitalSource. There can be no assurance, however, that such extensions of the current waivers will be granted.

The total amount outstanding on the Notes as of November 12, 2004 was $1,131, of which $6 represented accrued interest.

Secured Credit Facilities

On December 15, 2000, the Company entered into an agreement with DVI Business Credit Corporation (“DVI”) for a three-year revolving credit line of up to $7,250 (the “Credit Line”). In March 2003, DVI extended the term of the Credit Line to March 31, 2004. The facility was collateralized by present and future assets of certain operations of the Company. The borrowing base consisted of a certain percentage of eligible accounts receivable

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Liquidity and Capital Resources (dollar amounts in thousands) (continued)

(as defined in the agreement). Under the terms of the agreement, the Company paid a commitment fee of 0.50% of the unused portion of the Credit Line and certain other fees. The interest rate under the Credit Line was the prime rate plus 1.00%.

Effective March 18, 2003, the financial covenants under the Credit Line included a quarterly tangible net worth requirement of $2,500 (defined as shareholders’ equity plus subordinated debt and minority interests, less intangible assets, goodwill, deferred tax assets, leasehold improvements, deposits, and certain prepayments), a leverage coverage ratio not greater than 5.00 to 1.00, and a fixed charge ratio not less than 1.25 to 1.00 as well as certain restrictions relating to the acquisition of new businesses without the prior approval of DVI. The Company was not in compliance with certain of its covenants during the three months ended March 31 and June 30, 2003 and was granted waivers by DVI in both instances.

On August 21, 2003, shortly before DVI filed for Chapter 11 bankruptcy protection, DVI sold the Company’s loan to a subsidiary of CapitalSource Inc. (“CapitalSource”), a publicly traded asset-based lender. As of September 30, 2003, the Company did not meet any of its three financial covenants and was granted a waiver by CapitalSource.

On December 15, 2003, the Company entered into an agreement with CapitalSource for a new three-year revolving line of credit (the “CapitalSource Credit Line”) of up to $7,250. The CapitalSource Credit Line is collateralized by present and future assets of certain operations of the Company. The borrowing base consists of a certain percentage of eligible accounts receivable (as defined in the agreement). Under the terms of the agreement, the Company pays a commitment fee of 0.60% of the unused portion of the CapitalSource Credit Line and certain other fees. The interest rate under the CapitalSource Credit Line is the prime rate plus 1.00%, subject to a floor of 4.00% on the prime rate. At September 30, 2004, the interest rate under the CapitalSource Credit Line was 5.75%.

The financial covenants under the CapitalSource Credit Line consist of a fixed charge ratio (defined as the ratio for a defined period, of earnings before interest, taxes, depreciation, amortization, and other non-cash charges and non-recurring gains and losses to the sum of payments on long-term debt, exclusive of the Notes, and capital leases, accrued interest and dividends, and capital expenditures and income taxes paid in cash) of not less than 1.20 to 1.00, tested monthly on a trailing six months’ basis, commencing January 2004, and minimum liquidity (defined as the sum of unrestricted cash on hand, the Company’s pro rata share of cash on hand in its joint ventures, and the unborrowed availability under the CapitalSource Credit Line) of $1,000. In 2003, the fixed charge ratio was set at not less than 1.00 to 1.00 on a trailing four months’ basis through November 30, 2003 and a trailing five months’ basis through December 31, 2003. During the term of the agreement, the Company may enter into new capital lease obligations of up to $1,000 and must obtain the prior approval of CapitalSource before acquiring any new business. The Company was in compliance with its financial covenants through September 30, 2004. As of and for the trailing six months ended September 30, 2004, the Company’s fixed charge ratio was 2.00 to 1.00 and its minimum liquidity was $3,705.

Based on its projections, the Company expects to be in compliance through 2005 with its financial covenants under the CapitalSource Credit Line. However, there can be no assurance that the Company will meet its projections and if it does not, it may not be in compliance with its financial covenants in the future.

Long Term Debt

During the quarter, the Company renegotiated the payment terms on $1,000 due to a hospital system in Tennessee, $500 of which was payable on each of October 1, 2004 and 2005. Under the terms of the amended agreement, the Company will pay a total of $1,029 in fifteen monthly installments: six payments of $70, beginning

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Liquidity and Capital Resources (dollar amounts in thousands) (continued)

October 1, 2004; seven payments of $68, beginning April 1, 2005; and two payments of approximately $67, beginning November 1, 2005. However, the balance outstanding on September 30, 2005 of $201 will be payable in full on October 1, 2005 if such payment will not cause an immediate default under the Company’s CapitalSource Line, or if the Company reasonably believes, based on its historical financial performance, that it would not cause such a default within three months of the date such payment was made.

Lease Lines

In March 2001, the Company entered into an agreement for an equipment facility (the “Lease Line”) of $750 to provide secured financing. Borrowings under the facility are repayable over 42 months. The interest rate was based upon the 31-month Treasury Note (“T-Note”) plus a spread and fluctuated with any change in the T-Note rate up until the time of funding. At September 30, 2004, the Company had utilized all of its Lease Line.

In August 2002, the Company entered into an agreement for secured equipment lease financing in the approximate amount of $1,600 with Somerset Capital Group, Ltd. (the “Somerset Line”). Borrowings under the facility are repayable over 36 months. The lease-rate factors were based upon the 36-month Treasury Note yield ten days prior to payment commencement for each draw down. At the end of the lease term, the Company may either purchase the equipment for its then fair market value, renew the lease on a year-to-year basis at its then fair market value, or return the equipment with no further obligation. At September 30, 2004, the Company had utilized all of its Somerset Line, primarily to fund its equipment needs relating to the upgrade of its practice management system.

In December 2003, the Company entered into an agreement for secured equipment lease financing of approximately $330 with GE Healthcare Financial Services, Inc. (the “GE Lease Line”). The Company drew down $346 under the GE Lease Line during the nine months ended September 30, 2004. In June 2004, the GE Lease Line was increased by $250 (the “GE Lease Line Extension”), for a combined total lease line of $596. The GE Lease Line Extension is available for equipment purchases made during the balance of 2004. Borrowings under both facilities are repayable over 60 months. The interest rate on the GE Lease Line was initially set at certain percentage points above the Five Year Interest Rate Swap rate and subsequently changed to certain percentage points above the most recent weekly average rate of the Five Year Treasuries, both rates being struck at the time of funding. The weighted average interest rate on the GE Lease Line is 8.90%. The interest rate on the GE Lease Line Extension is set at a fixed 5.05 percentage points above the most recent weekly average rate of the Five Year Treasuries at the time of funding. At September 30, 2004, the weekly average rate of Five Year Treasuries was 3.35%, and the Company had not drawn down any of the GE Lease Line Extension.

Use of Funds

The Company expects that its principal use of funds in the foreseeable future will be for the repayment of the Notes and other debt obligations, and for working capital requirements, purchases of property and equipment, and acquisitions and the formation of joint ventures. The Company believes that the funds available under the CapitalSource Credit Line, and the GE Lease Line Extension, together with cash generated from operations, and other sources of funds it anticipates will be available to it, will be adequate to meet these projected needs. However, the Company recognizes that the level of its available financial resources is an important competitive factor, and it will consider additional financing sources, including raising additional equity capital, as appropriate.

Inflation

The Company does not believe that inflation had a significant impact on its results of operations during the last two years. Nor is inflation expected to adversely affect the Company in the future unless it increases substantially and the Company is unable to pass through the resulting cost increases in its billings.

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Seasonality

The Company is subject to the seasonal fluctuations that impact the various employers and their employees it serves. Historically, these fluctuations have occurred most noticeably in portions of the first and fourth calendar quarters. Traditionally, revenues are lower during these periods since patient visits decrease due to plant closings, vacations, holidays, a reduction in new employee hires, and inclement weather. These activities also result in a decrease in drug and alcohol tests, medical monitoring services, and pre-employment examinations. Similar fluctuations occur during the summer months, but typically to a lesser degree than during the first and fourth calendar quarters. The Company attempts to ameliorate the impact of these fluctuations through adjusting staff levels.

Professional Liability Insurance Risk

The Company maintains professional liability insurance coverage both on the Company as an entity and in the name of its employed physicians, as well as an umbrella policy to supplement that coverage. In recent years, the Company, in line with the healthcare industry in general, has experienced significant increases in the cost of such insurance. For its policy year commencing March 1, 2003, the cost to the Company for its professional liability and umbrella insurance approximately doubled to $669 from $343 in the prior policy year, despite the Company’s assuming more of the risk itself. The cost for the policy year commencing March 1, 2004, with similar coverage to 2003, is $772, a 15.4% increase over the prior policy year. Maintenance of an appropriate level of professional liability insurance coverage is critical to the Company in order to attract and retain competent clinical staff, the core of its business. While the Company currently believes that it will continue to be able to purchase such insurance, there can be no assurance that the cost of doing so will not have a serious negative effect on its operating results since the price it can charge for many of its services is dependent upon fee schedules set by the states in which it operates, and changes in those schedules generally lag the increase in medical-related costs.

Important Factors Regarding Forward-Looking Statements

Statements contained in this Quarterly Report on Form 10-Q, including in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which statements are intended to be subject to the “safe-harbor” provisions of the Private Securities Litigation Reform Act of 1995. The forward-looking statements are based on management’s current expectations and are subject to many risks and uncertainties which could cause actual results to differ materially from such statements. Such statements include statements regarding the Company’s objective to develop a network of regional occupational healthcare systems providing integrated services through multi-disciplinary teams. In addition, when used in this report, the words “anticipate,” “plan,” “believe,” “estimate,” “expect” and similar expressions as they relate to the Company or its management are intended to identify forward-looking statements. Among the risks and uncertainties that will affect the Company’s actual results are locating and identifying suitable partnership candidates; the ability to consummate operating agreements on favorable terms; the success of such ventures, if completed; the costs and delays inherent in managing growth; the ability to attract and retain qualified professionals and other employees to expand and complement the Company’s services; the availability of sufficient financing; the attractiveness of the Company’s capital stock to finance its ventures; strategies pursued by competitors; the restrictions imposed by government regulation; changes in the industry resulting from changes in workers’ compensation laws and regulations in the healthcare environment generally; and other risks described in this Quarterly Report on Form 10-Q and the Company’s other filings with the Securities and Exchange Commission. The forward-looking statements speak only as of the date on which such statements are made. The Company undertakes no obligation to publicly update or revise any forward-looking statements, based on new information, future events or otherwise.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company has considered the provisions of Financial Reporting Release No. 48, Disclosure of Accounting Policies for Derivative Financial Instruments and Derivative Commodity Instruments, and Disclosure of Quantitative and Qualitative Information About Market Risk Inherent in Derivative Financial Instruments, Other Financial Instruments and Derivative Commodity Instruments. The Company has no holdings of derivative financial or commodity-based instruments or other market risk sensitive instruments entered into for trading purposes at September 30, 2004. As described in the following paragraph, the Company believes that it currently has no material exposure to interest rate risks in its instruments entered into for other than trading purposes.

Interest Rates

The Company’s balance sheet includes a revolving credit facility and a lease line which are subject to interest rate risk. The revolving credit facility is priced at a floating rate of interest while the interest rate on the unused lease line is subject to market fluctuations until a draw down is effected. As a result, at any given time a change in interest rates could result in either an increase or a decrease in the Company’s interest expense. The Company performed sensitivity analysis as of September 30, 2004 to assess the potential effect of a 100 basis point increase or decrease in interest rates and concluded that near-term changes in interest rates should not materially affect the Company’s consolidated financial position, results of operations, or cash flows.

ITEM 4. CONTROLS AND PROCEDURES

As of the end of the period covered by this report, an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures was conducted under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were adequate and designed to ensure that information required to be disclosed by the Company in this report is recorded, processed, summarized and reported in a timely manner, including that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

There was no significant change in internal control over financial reporting that materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting, including any corrective actions with regard to significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting, subsequent to the evaluation described above.

Reference is made to the Certifications of the Chief Executive Officer and Chief Financial Officer about these and other matters that are filed as exhibits to this report.

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PART II - OTHER INFORMATION

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

On March 24, 2003, the Company repurchased of all of its outstanding Series A Convertible Preferred Stock for (i) $2,700 in cash at closing, (ii) subordinated promissory notes (the “Notes”) in the aggregate principal amount of $2,700, and (iii) 1,608,247 shares of the Company’s common stock. Under the terms of the Notes, the Company was required to pay three installments of principal of $900 on each of March 24, June 24, and September 24, 2004, together with accrued interest thereon.

On March 24, 2004, the Company paid $450 of the principal amount of $900 which was due on the Notes as of that date, together with accrued interest thereon. On each of May 5, 2004 and June 18, 2004, the Company paid an additional $225 of principal, being the balance of the amount due on its Notes as of March 24, 2004, together with accrued interest thereon of $22 and $27, respectively. However, the Company elected not to pay the $900 due on the Notes on June 24, 2004 and reverted to default.

On July 23, 2004, the Company paid $243 on the Notes, being the total interest accrued thereon as of that date. On each of August 27, September 30 and October 29, 2004, the Company paid an additional $225 of principal together with accrued interest thereon of $26, $22 and $16, respectively.

If the Company does not fulfill its contractual payment obligations, the annual interest rate on the unpaid principal and interest increases to 15.00% from 8.00% until such default is cured. A default under the Notes permits the Note holders to accelerate payment of all unpaid principal and interest. However, under the CapitalSource Credit Line, no amounts can be paid to the Note holders if CapitalSource objects. The default under the Notes on March 24, 2004 created a cross default under the CapitalSource Credit Line. Accordingly, the Company obtained a waiver from CapitalSource on March 30, 2004 which waives any similar cross default that will occur as a result of any additional partial payment of the Notes by the Company through March 31, 2005. Also on March 30, 2004, the Note holders agreed in writing not to pursue any remedies related to the failure to make a full installment payment on the Notes through March 31, 2005.

The Company anticipates making additional payments on the Notes in future months. Due to an increase in days sales outstanding in accounts receivable and a consequent reduction in liquidity, the Company now expects to generate sufficient funds to repay the remaining principal amount of $1,125 by March 31, 2005 whereas previously it had anticipated repaying the amount due by December 31, 2004. Nevertheless, if cash is required for operations, the Company will continue to defer payments on the Notes and may be required to request an extension of the current waivers from both the Note holders and CapitalSource. There can be no assurance, however, that such extensions of the current waivers will be granted.

The total amount outstanding on the Notes as of November 12, 2004 was $1,131, of which $6 represented accrued interest.

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ITEM 6. EXHIBITS

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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 thereunto duly authorized.

Date: November 12, 2004

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EXHIBIT INDEX

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