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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended: March 31, 2005

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 May 6, 2005 was 3,094,875.

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OCCUPATIONAL HEALTH + REHABILITATION INC

Quarterly Report on Form 10-Q

For the Quarter Ended March 31, 2005

TABLE OF CONTENTS

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PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

OCCUPATIONAL HEALTH + REHABILITATION INC

Consolidated Balance Sheets

(dollar amounts in thousands, except share data – par value)

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

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OCCUPATIONAL HEALTH + REHABILITATION INC

Consolidated Statements of Income

(dollar 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. 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 March 31, 2005 and results of operations for the three months ended March 31, 2005 and 2004. The results of operations for the three months ended March 31, 2005 are not necessarily indicative of the results that may be expected for the full year or for any future period.

2. Reclassifications

Certain prior year amounts have been reclassified on the accompanying Consolidated Financial Statements to conform to the 2005 presentation. The Company has reclassified its financial statements in order to present its center operating profit and has reallocated depreciation expense between center operating expenses and general and administrative expenses, as applicable.

3. Significant Accounting Policies

In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 123R, Share-Based Payment. SFAS 123R is a revision of SFAS No. 123, Accounting for Stock-Based Compensation, and supersedes Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees. SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. In April 2005, the Securities and Exchange Commission delayed the effective date of the provisions of SFAS 123R to annual periods beginning after June 15, 2005. The Company is currently evaluating the provisions of this revision to determine the impact on its financial statements. It is, however, expected to have a negative effect on net income.

As permitted by SFAS 123, the Company currently accounts for share-based payments to employees using the intrinsic value method permitted by APB 25 and accordingly does not recognize any compensation cost for employee stock options. Accordingly, adoption of the fair value method required by SFAS 123R will have an impact on the Company’s results of operations, although it will have no impact on its overall financial position. The impact of the modified prospective adoption of SFAS 123R cannot be estimated at this time because it will depend on levels of share-based payments granted in the future. However, had the Company adopted SFAS 123R in prior periods, the impact of that standard would have approximated the impact of SFAS 123 as described in the disclosure of pro forma net income and earnings per share.

In December 2004, the FASB decided to defer issuance of their final standard on earnings per share (“EPS”) entitled Earnings per Share, an Amendment to SFAS 128. The final standard will be effective in 2005 and will require retrospective application for all prior periods presented. The significant proposed changes to the EPS computation are changes to the treasury stock method and contingent share guidance for computing year-to-date diluted EPS, removal of the ability to overcome the presumption of share settlement when computing diluted EPS when there is a choice of share or cash settlement and inclusion of mandatorily convertible securities in basic EPS. The Company is currently evaluating the proposed provisions of this amendment to determine the impact on its consolidated financial statements.

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Notes to Consolidated Financial Statements (continued)

The Company has a Stock Option Program. SFAS No. 123, Accounting for Stock Based Compensation, encourages entities to recognize as expense over the vesting period the fair market value of all stock-based awards on the date of grant. Alternatively, SFAS 123 allows entities to continue to apply the provisions of APB No. 25 and provide pro forma net income and pro forma earnings per share disclosures for employee stock grants as if the fair-value method defined in SFAS 123 had been applied.

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 per share if the Company had applied the fair value recognition provisions of SFAS 123 to the Stock Option Program.

4. Other Credit Arrangements

Collateralized Credit Facilities

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 March 31, 2005, the interest rate under the CapitalSource Credit Line was 6.75%.

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 subordinated promissory notes (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 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. During the term of the agreement, the Company may enter into new capital lease obligations of up to $1,000, must obtain the prior approval of CapitalSource before acquiring any new business, and is prohibited from the payment of

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Notes to Consolidated Financial Statements (continued)

dividends. The Company was in compliance with its financial covenants through March 31, 2005. As of and for the trailing six months ended March 31, 2005, the Company’s minimum liquidity was $3,053 and its fixed charge ratio was 1.57, respectively.

At March 31, 2005, the maximum amount available under the CapitalSource Credit Line borrowing base formula was $6,744, of which $5,765 was outstanding.

Subordinated Promissory Notes

Under the terms of 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 did not fulfill its contractual payment obligations, the annual interest rate on the unpaid principal and interest increased to 15.00% from 8.00% until such default was 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 such default in order to conserve its cash resources for operating purposes. The Company has determined that this default, under the terms of the Notes, does not constitute a cross default with respect to third party contractual obligations of the Company other than CapitalSource.

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 waived any similar cross default that occurred 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, October 29, November 30 and December 22, 2004 the Company paid an additional $225 of principal together with accrued interest thereon of $26, $22, $16, $15 and $8, respectively.

In January 2005, the Company determined that, due primarily to a deterioration in the days sales outstanding in its accounts receivable and a consequent reduction in liquidity, it should conserve its cash and not pay the balance outstanding on the Notes by March 31, 2005, the expiration date of the waiver granted by CapitalSource. Accordingly, effective March 7, 2005, the Company obtained from CapitalSource an extension of its waiver through December 31, 2005. Also effective March 7, 2005, the Note holders agreed in writing to extend their original agreement dated March 24, 2004 to not pursue any remedies related to the failure to pay the Notes when due from March 31, 2005 to December 31, 2005.

At March 31, 2005, the total amount outstanding on the Notes was $703, of which $28 represented accrued interest

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Notes to Consolidated Financial Statements (continued)

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, 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 Per Share

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

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

There were 73 and 689 shares under option plans that were excluded from the computation of diluted earnings per share at March 31, 2005 and 2004, respectively, due to their anti-dilutive effects.

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Notes to Consolidated Financial Statements (continued)

6. Acquisition of Assets of Medical Practice

On January 4, 2005, the Company purchased certain assets from a medical practice in Pawtucket, Rhode Island for $18 and allocated such assets between its two centers located in Rhode Island.

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

Overview

Occupational Health + Rehabilitation Inc (the “Company”) is a leading provider of occupational healthcare services to employers and their employees specializing 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 sub-management 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, the Merger, 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 and rehabilitation 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 compliance services for about 25%, and workplace health and rehabilitation services for about 10%. The Company operates 35 centers, of which 26 are in the northeast of the United States, five are in Tennessee, and four are 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 example, 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 recent 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 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 bodies 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 asset on its balance sheet. The Company closely monitors its days sales outstanding, a measure computed by dividing its annual 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 debt or for general corporate purposes. Conversely, an increase in its days sales outstanding results in less liquidity for the Company and restricts management’s operating flexibility.

The Company’s major focus is building its revenue base. Once a center has covered its fixed costs, which account on average for approximately 55% of its revenue and consist primarily of employee-related expenses and rent and occupancy charges, each additional dollar of revenue generates a high variable profit margin. A new injury visit, for example, generates about $770 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. 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 third-party payers, employers 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.

Goodwill and Other Intangible Assets

The Company has adopted the Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standard (“SFAS”) No. 142, Goodwill and Other Intangible Assets, which was effective January 1, 2002. SFAS 142 requires, among other things, the discontinuance of goodwill amortization.

The Company performs an impairment test on goodwill on an annual basis or on an interim basis if an event or circumstance indicates that it is more likely than not that an impairment loss has been incurred. Impairment is determined by comparing the fair value to the carrying value of the reporting units. The fair value of each reporting unit is determined based on its discounted future cash flows using a discount reflecting the Company’s average cost of funds. If impairment were determined to have occurred, the Company would make the appropriate adjustment to goodwill to reduce the assets’ carrying value. No such impairment existed at March 31, 2005 or December 31, 2004.

Other intangible assets are comprised of non-compete agreements and deferred financing costs which are being amortized using the straight-line method over periods of three to five years. The Company performs an impairment test on such definite-lived intangibles when facts and circumstances exist which would suggest that the intangibles may be impaired. If impairment were determined to have occurred, the Company would make the appropriate adjustment to the intangible asset to reduce the asset’s carrying value to fair value. No such impairment existed at March 31, 2005 or December 31, 2004.

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Critical Accounting Policies (continued)

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 full-time physicians on a claims-made basis. At December 31, 2004, 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 March 31, 2005, the Company reviewed this liability and determined that the amount remained appropriate at 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.

Reserves for Employee Medical Benefits

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

The following table sets forth, for the periods indicated, the relative percentages which certain items in the Company’s consolidated statements of income 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 March 31, 2005 and 2004

Net Revenue

Net revenue increased by $418 or 3.0% to $14,523 for the three months ended March 31, 2005 from $14,105

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

for the three months ended March 31, 2004. Net revenue at centers open for comparable periods in both years increased by $475, or 4.9%, primarily due to growth in revenue per visit as a result of price increases. Same center new injury initial visits increased 2.5% for the quarter ended March 31, 2005. The growth in initial visits reflects an improving economic climate in the markets served by the Company and represents a marked improvement from the performance for the year ended December 31, 2004 when new injury initial visits decreased from the prior year. Same center prevention and regulatory compliance services revenue increased 3.7% for the quarter ended March 31, 2005.

Center Operating Expenses

Center operating expenses decreased $119, or 1.0%, to $12,021 for the three months ended March 31, 2005 from $12,140 for the three months ended March 31, 2004. The principal decreases in expenses related to smaller bonus accruals due to a change in the structure of the Company’s bonus program and to no recorded costs related to the upgrade of the Company’s practice management system, which was completed in December 2004. Partially offsetting these decreases in expenses were increases in both employee-related costs, primarily medical insurance premiums, and temporary staff in the central billing and collection office. As a percentage of net revenue, center operating expenses decreased to 82.8% for the three months ended March 31, 2005 from 86.1% for the three months ended March 31, 2004.

General and Administrative Expenses

General and administrative expenses increased $101, or 8.3%, to $1,319 for the three months ended March 31, 2005 from $1,218 for the three months ended March 31, 2004, with increases in management bonus accruals, professional fees and medical insurance premiums being partially offset by a reduction in regional management expenses. As a percentage of net revenue, general and administrative expenses increased to 9.1% for the three months ended March 31, 2005 from 8.6% for the three months ended March 31, 2004.

Interest Expense, net

Interest expense decreased to $182 for the three months ended March 31, 2005 from $195 for the three months ended March 31, 2004. The decrease was attributable primarily to a reduction in the amount of long-term debt outstanding, partially offset by an increase in the interest rate payable on the Company’s line of credit which is tied to the prime rate. Interest income was $5 for the three months ended March 31, 2005 and $1 for the three months ended March 31, 2004. As a percentage of net revenue, interest expense, net decreased to 1.2% for the three months ended March 31, 2005 from 1.4% for the three months ended March 31, 2004.

Minority Interest

Minority interest represents the share of (profits) and losses of joint venture investors with the Company. For the three months ended March 31, 2005, the minority interest in pre-tax profits of the joint ventures was $257 compared to $200 in the three months ended March 31, 2004.

Tax Provision

The tax provision was $310 and $139 and the effective tax rates 42.2% and 41.1% for the three months ended March 31, 2005 and 2004, respectively. The increase in the effective tax rate reflects the Company’s improved profitability and a consequent additional charge to tax expense to cover state tax liabilities.

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

Off Balance Sheet Arrangements

The Company does not currently have any off balance sheet arrangements.

Significant Accounting Contractual Obligations

The following summarizes the Company’s contractual obligations at March 31, 2005, and the effect such obligations are expected to have on its liquidity and cash flows in future periods.

Liquidity and Capital Resources

At March 31, 2005, the Company had negative working capital of $1,202 compared to negative working capital of $1,960 at December 31, 2004. The Company’s principal sources of liquidity as of March 31, 2005 consisted of (i) cash and cash equivalents aggregating $2,460, (ii) uncollateralized accounts receivable of $2,170,and (iii) $979 available under its line of credit.

Net cash provided by operating activities for the three months ended March 31, 2005 was $1,974 compared to $1,181 for the three months ended March 31, 2004. The increase in liquidity during the quarter primarily reflected favorable changes in working capital as compared to the prior year when accounts receivable increased by $863 a result of strong revenue growth over the prior year. Days sales outstanding in accounts receivable, net of allowances, were 67 at March 31, 2005 compared to 64 at March 31, 2004. The increase in days sales outstanding was due primarily to the temporary negative impact on collections resulting from the conversion of center operations to the Company’s upgraded practice management system with its related changes in center operating processes.

Net cash used by investing activities for the three months ended March 31, 2005 was $38 compared to $24 for the three months ended March 31, 2004. Fixed asset additions amounted to $31 and $24 for the three months ended March 31, 2005 and 2004, respectively. Fixed asset purchases in the three months ended March 31, 2005 were primarily for medical and office equipment, and fixed asset purchases in the three months ended March 31, 2004 were primarily for information systems equipment. Net cash used by investing activities for the three months ended March 31, 2005 also included $7 for a client list acquired in connection with the purchase of certain assets from a medical practice in Rhode Island.

Net cash used by financing activities was $558 and $1,501 for the three months ended March 31, 2005 and 2004, respectively. In the three months ended March 31, 2005, the Company increased its borrowings $357, net of repayments, under its line of credit, primarily to repay long-term debt obligations. In the three months ended March 31, 2004, the Company repaid $376, net of advances, under its line of credit.

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

In the three months ended March 31, 2005 and 2004, the Company used funds of $586 and $669, respectively, to pay long-term debt and capital lease obligations. The Company also used funds of $339 and $442, respectively, relating to distributions to its joint venture partners. Distributions of cash in joint ventures to the Company and its joint venture partners provide 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.

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 did not fulfill its contractual payment obligations, the annual interest rate on the unpaid principal and interest increased to 15.00% from 8.00% until such default was 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 such default in order to conserve its cash resources for operating purposes. The Company has determined that this default, under the terms of the Notes, does not constitute a cross default with respect to third party contractual obligations of the Company other than CapitalSource.

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 waived any similar cross default that occurred 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, October 29, November 30 and December 22, 2004 the Company paid an additional $225 of principal together with accrued interest thereon of $26, $22, $16, $15 and $8, respectively.

In January 2005, the Company determined that, due primarily to a deterioration in the days sales outstanding in its accounts receivable and a consequent reduction in liquidity, it should conserve its cash and not pay the balance outstanding on the Notes by March 31, 2005, the expiration date of the waiver granted by CapitalSource. Accordingly, effective March 7, 2005, the Company obtained from CapitalSource an extension of its waiver through December 31, 2005. Also effective March 7, 2005, the Note holders agreed in writing to extend their original agreement dated March 24, 2004 to not pursue any remedies related to the failure to pay the Notes when due from March 31, 2005 to December 31, 2005.

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

At March 31, 2005, the total amount outstanding on the Notes was $703, of which $28 represented accrued interest.

Collateralized Credit Facilities

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 0.6% 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.

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 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. During the term of the agreement, the Company may enter into new capital lease obligations of up to $1,000, must obtain the prior approval of CapitalSource before acquiring any new business, and is prohibited from the payment of dividends. The Company was in compliance with its financial covenants through March 31, 2005. As of and for the trailing six months ended March 31, 2005, the Company’s minimum liquidity was $3,053 and its fixed charge ratio was 1.57, respectively.

Based on its projections, the Company expects to be in compliance during 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

In May 2003, the Company purchased five occupational health clinics located in Tennessee which it had previously managed for a total consideration of $1,700, of which $300 was paid in cash with the balance payable in varying installments through October 2005. In September 2004, the Company renegotiated the payment terms on $1,000 then outstanding. Under the terms of the amended agreement, the Company is obligated to pay a total of $1,029 in fifteen monthly installments of approximately equal amounts, commencing October 1, 2004. At March 31, 2005, the discounted amount payable was $598.

In February 2002, the Company purchased two occupational health clinics located in New Jersey. The purchase price of these clinics was $610, of which $70 was paid in cash and the balance in the form of a subordinated note payable in varying installments through February 2005. In January 2005, the Company renegotiated the payment terms on the subordinated note. Under the terms of the amended agreement, the Company is obligated to pay the outstanding amount in varying installments between February 1, 2005 and May 1, 2005. At March 31, 2005, the amount payable was $100.

Lease Lines

In March 2001, the Company entered into an agreement for an Equipment Facility (the “Equipment Facility”) of $750 to provide secured financing. Borrowings under the facility are repayable over 42 months. The interest

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

rate was based upon the 31-month Treasury Note (“T-Note”) plus a spread and fluctuates with any change in the T-Note rate up until the time of payment commencement for each draw down. At March 31, 2005, the full amount of the Equipment Facility had been utilized. Interest rates range from 9.93% to 10.99%.

In August 2002, the Company entered into an agreement for collateralized equipment lease financing in the approximate amount of $1,600 (the “Collateralized Line”). Borrowings under the facility are repayable over 36 months. The lease-rate factors are 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 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. The Company has utilized this lease line primarily to fund its equipment needs relating to the upgrade of its practice management system. At March 31, 2005, the full amount of the Collateralized Line had been utilized. Interest rates range from 3.25% to 9.65%.

In December 2003, the Company entered into an agreement for collateralized equipment lease financing of approximately $330 (the “Lease Line”). The Company drew down $346 under the Lease Line. In June 2004, the Lease Line was increased by $250 which was available for equipment purchases made during the balance of 2004. The Company drew down $133 of this amount by the end of the year for a total draw down under the line of $479. In March 2005, the Lease Line was increased by $500 which was available for equipment purchases made during 2005 (the “Lease Line Extension”). Borrowings under these facilities are repayable over 60 months. The interest rate on the Lease Line was initially set at certain percentage points above the Five Year Interest Rate Swap rate and was subsequently changed to certain percentage points above the most recent weekly average rate of the Five Year Treasury Notes, both rates being struck at the time of funding. The weighted average interest rate on the Lease Line is 8.90%. The interest rate on the Lease Line Extension is set at a fixed 4.89 percentage points above the most recent weekly average rate of the Five Year Treasuries at the time of funding. At March 31, 2005, the weekly average rate of the Five Year Treasuries was 4.13%, and the Company had not drawn down any of the Lease Line Extension.

The Company has also entered into equipment lease arrangements with other lenders. Interest rates on these leases range from 11.35% to 14.79%.

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 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 increases in its billings.

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

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Seasonality (continued)

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 quarters. The Company attempts to ameliorate the impact of these fluctuations through adjusting staff levels.

Professional Liability Insurance Risk

The Company maintains entity professional liability insurance coverage on a claims-made basis, shared professional liability insurance coverage in the name of its full-time physicians, also on a claims-made basis, and an umbrella policy to supplement those coverages. In recent years, the Company, in line with the healthcare industry in general, has experienced significant increases in the cost of such insurance. The annual cost to the Company for its professional liability and umbrella insurance increased 125% to $772 from $343 between 2002 and 2004 with similar coverage, despite the Company’s assuming more of the risk itself. In February 2005, however, the Company was able to take advantage of an apparent softening in the market for such insurance coverage as new carriers entered the market, attracted in part by the higher premiums, and renewed its coverage at a cost about 10% below that of the prior policy year. Whether or not this moderately favorable climate represents the beginning of a longer term trend or is merely a brief aberration is unknown. 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, whether as a result of 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 March 31, 2005. 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 lease lines which are subject to interest rate risk. The revolving credit facility is priced at a floating rate of interest while the interest rates on the lease lines are 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 March 31, 2005 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 have 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 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 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 did not fulfill its contractual payment obligations, the annual interest rate on the unpaid principal and interest increased to 15.00% from 8.00% until such default was 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 such default in order to conserve its cash resources for operating purposes. The Company has determined that this default, under the terms of the Notes, does not constitute a cross default with respect to third party contractual obligations of the Company other than CapitalSource.

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 waived any similar cross default that occurred 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, October 29, November 30 and December 22, 2004 the Company paid an additional $225 of principal together with accrued interest thereon of $26, $22, $16, $15 and $8, respectively.

In January 2005, the Company determined that, due primarily to a deterioration in the days sales outstanding in its accounts receivable and a consequent reduction in liquidity, it should conserve its cash and not pay the balance outstanding on the Notes by March 31, 2005, the expiration date of the waiver granted by CapitalSource. Accordingly, effective March 7, 2005, the Company obtained from CapitalSource an extension of its waiver through December 31, 2005. Also effective March 7, 2005, the Note holders agreed in writing to extend their original agreement dated March 24, 2004 to not pursue any remedies related to the failure to pay the Notes when due from March 31, 2005 to December 31, 2005.

The Company anticipates paying the balance due on the Notes before December 31, 2005. 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 May 13, 2005 was $715, of which $40 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.

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EXHIBIT INDEX